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THE 1969 ECONOMIC REPORT
OF THE PRESIDENT
HEARINGS
BEFORE THE.
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETY-FIRST CONGRESS
FIRST SESSION
PART 1
JANUARY 17, 1969
24-833 0
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON: 1969
Printed for the use of the Joint
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For sale by the Superintendent of Documents, U.S. Government Printing Office
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-~
JOINT ECONOMIC COMMITTEE
[Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.]
WRIGHT PATMAN, Texas, Chairman
WILLIAM PROXMIRE, Wisconsin, Vice Chiairma;v
HOUSE OF REPRESENTATIVES SENATE
RICHARD BOLLING, Missouri JOHN SPARKMAN, Alabama
HALE BOGGS, Louisiana J. W. FULBRIGHT, Arkansas
HENRY S. REUSS, Wisconsin HERMAN E. TALMADGE, Georgia
MARTHA W. GRIFFITHS, Michigan STUART SYMINGTON, Missouri
WILLIAM S. MOORHEAD, Pennsylvania ABRAHAM RIBICOFF, Connecticut
WILLIAM B. WIDNALL, New Jersey JACOB K. JAVIPS, New York
DONALD RUMSFELD, Illinois JACK MILLER, Iowa
W. E. BROCK, III, Tennessee LEN B. JORDAN, Idaho
BARBER B. CONABLE, JR., New York CHARLES H. PERCY, Illinois
JOHN H. STARK, Executive Director
JAMES W. KNOWLES, Director of Research
EcoNoMIsTs
RICHARD F. KAUFMAN ROBERT H. HAVEMAN JOHN R. KARLICK
FRAZIER KELLOGG DoUGLAs C. FRECHTLING (Minority)
(II)
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CONTENTS
WITNESSES AND STATEMENTS
Patman, Hon. Wright, Chairman of the Joint Economic Committee: Page
Opening remarks 1
Javits, Hon. Jacob K., ranking minority member of the Joint Economic
Committee: Opening statement 2
Barr, Hon. Joseph W., Secretary of the Treasury 4
Okun, Hon. Arthur M., Chairman of the Council of Economic Advisers - 95
Zwick, Hon. Charles J., Director of the Bureau of the Budget 98
ADDITIONAL INFORMATION AND EXHIBITS
Barr, Hon. Joseph W.:
Staff study: "Comparison of Budget Outlays and Tax Expenditures
by Function-Fiscal Year 1970" 11
Supplementary statement: "Tax Expenditures- Government Ex-
penditures Made Through the Income Tax System" 32
Table 1. National Defense, Tax Expenditures, 1968 34
Table 2. International Affairs and Finance, Tax Expenditures,
1968 35
Table 3. Agriculture and Agricultural Resources, Tax Expendi-
tures, 1968 35
Table 4. Natural Resources, Tax Expenditures, 1968 36
Table 5. Commerce and Transportation, Tax Expenditures, 1968 38
Table 6. Community Development and Housing, Tax Expendi-
tures, 1968 38
Table 7. Health and Welfare, Tax Expenditures, 1968 41
Table 8. Education and Manpower, Tax Expenditures 42
Table 9. Veterans Benefits and Services, Tax Expenditures, 1968 42
Table 10. Aid to State and Local Government Financing, Tax
Expenditures, 1968 43
Prepared statement 44
Charts and text: "The Fiscal Program for 1970 in Perspective"_~ - 49
Response to Chairman Patman query re high interest rates 112
Response to request from Chairman Patman for comment re Urban
Development Bank 114
Response to Chairman Patman query re "realistic budget" 138
Reply to Chairman Patman's query re increase in 1970 tax receipts~ - 139
Council of Economic Advisers:
Response to Chairman Patman's query re high interest rates 112
Response to Chairman Patman's query re "realistic budget" 137
Reply to Chairman Patman's query re increase in 1970 tax receipts~ - 139
Javits, Hon. Jacob K.:
Editorial: "Unbalanced Budget Priorities," New York Times 214
Patman, Hon. Wright:
Treasury Department publication: "Maintaining the Strength of the
U.S. Dollar in a Strong Free World Economy" 223
Zwick, Hon. Charles J.:
Charts: "1970 Budget Charts" 99
Prepared statement 109
Response to Chairman Patman's query re high interest rates. 113
Response to Chairman Patman's query re "realistic budget" 138
Material submitted in response to questioning by Representative
Rumsfeld re functional classification of budget 152
Letter sent to New York Times replying to editorial "Unbalanced
Budget Priorities" 215
III
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THE 1969 ECONOMIC REPORT OF THE PRESIDENT
FRIDAY, JANUARY 17, 1969
CONGRESS OF THE UNrri~ STATES,
JOINT EOON0MIO CoMi\n'rn~,
Was Mngt 0%, DLI.
The Joint Economic Committee met, pursuant to notice, at 10 a.m.,
in room S-407, the Capitol, Hon. Wright Patman (chairman of the
joint committee) presiding.
Present: Representatives Patman, B olling, Griffiths, Moorhead,
Widnall, and Rumsfeld; and Senators Proxmire, Javits, and Percy.
Also present: John R. Stark, executive director and Douglas 0.
Frechtling (minority).
Chairman PATMAN. The committee will please come to order.
Today the Joint Economic Committee begins its annual review of
the state of the economy and the programs designed to achieve the
objectives of the Employment Act of 1946.
We have just received from the outgoing administration their
budget proposals for the coming fiscal year and their Economic Report.
It is important that we take this opportunity to hear from them in
regard to these and related matters.
In greeting you gentlemen this morning-the top three officials of
the Government so far as public economic policy is concerned-I want
to take the opportunity to commend you for your record in office.
We have been fortunate to have men of your outstanding abilities
and character in the key economic posts of the Government and I
want you to know that we are most appreciative of your assistance on
numerous occasions.
There is a great deal of material to cover and we are well aware
that this is just about the last day we will have the opportunity to
review it with you as representatives of the administration. For that
reason it seems appropriate for the three of you to appear together
so that we can more easily discuss question with you. After you have
made your statements we will have questions from the members of the
committee.
*The Senator from New York, Mr. Javits, the Joint Economic Com-
mittee's ranking minority member, would like to make a statement.
Senator Javits, you may proceed.
(1)
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2
STATEMENT OP HON. JACOB K. FAVITS, A U.S. SENATOR PROM THE
STATE OP NEW YORK, AI~Th THE RANKING MINORITY MEMBER
OF THE Ji}INT ECONOMIC COMMITTEE
Senator JAVITS. First, gentlemen-first, Mr. Chairman, may I thank
the Chair for its indulgence in allowing me to make a brief statement.
Second, may I say to these three top officers of our Government
that you represent in your own person here this morning the very
embodiment of what gives our country such great stability, as you are
in the economic field the expression of the smoothness of transition
from the present to a new administration.
Our chairman has worked out the hearing question so that within
a period of 30 days, roughly, the country will have the benefit of your
views and your experience as well as the initial bow of the new ad-
ministration through what it says about your Economic Report. Thus,
the American people will have the best of both worlds in the whole
fiscal field.
I think this is a tremendous tribute to you and to our Government
and to what makes it go-which are people like yourself. I would
like to express as an American and as a Senator my appreciation for
that.
I have a few remarks on the Economic Report and the budget
message. The outgoing Democratic administration in both these rnes-
sages, recounts our economy's enviable record of achievement over
the last 5 years. It. is true that we are participating in the longest
economic expansion in our Nation's history, that our growth in eco-
nomic potential and production has been enormous and that overall
unemployment has been pushed to record low levels. Although some
may argue that the Vietnam war has helped fuel our prosperity and
inflate our employment total, none will disput.e the fact that we now
have the means to insure balanced economic growth and prosperity,
if only we will use them properly.
But we must. not allow ourselves to become lulled into any idea
that we are to have permanent prosperity by the euphoric enumera-
tion of the economic milestones we have passed during the last several
years, for there are grave dangers facing us now. I would like to
refer briefly to them.
Overstimulated economic growth has produced a price inflation
foreign to us for so many years. Over the 12 months of 1968, consumers
have watched prices rise at a rate greater than 41/2 percent-more
than any year since the Korean war. Wage increases have become
commonplace yet the average worker with three dependents finds his
real spendable earnin~s reduced to levels below 1 year ago-while
his dollar earnings have increased almost $4 a week, his real spendable
earnings have declined 36 cents.
An overall unemployment rate at its post-Korean war low masks
the fact that not all are participating equally in our high employment
economy. Nonwhite workers and teenagers have consistently faced
unemployment rates substantially higher than the total and the
sniralin~ welfare rolls-and we can certainly testify to that. in New
York City-testify that economic growth has not reached the poor.
Further, many of those who are employed receive an income less
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than adequate to take care of their families' needs, especially even
their elementary education and health needs.
A grave problem that we must confront squarely is our country's
balance-of-payments position. While it is true that we have achieved
in 1968 an apparent balance for the first time in many years, this was
achieved only by leaning on the crutch of capital controls and window
dressing such as special official foreign purchases of U.S. Govern-
ment securities. We cannot let this obscure the fact that our trade
balance, for many years the source of strength in our international
accounts, has deteriorated alarmingly. The longer we continue to prop
up our balance-of-payments accounts with accounting gimmicks to
provide an arithmetic balance, the more damaging will become the
underlying weaknesses and the more difficult will be true improvement
in our position.
While great strides have been made in improving the operation of
the international monetary system, the three crises of 1968 are proof
that we have a long way to go.
On the domestic front, it seems to me that we are fast approaching
the end of an era. Solutions that may have been relevant to an earlier
day are inappropriate to an incredibly changing world. Our neglected
cities, deteriorating welfare system, the mounting financial problems
of our State and local governments and obviously ineffective agricul-
tural price policies are living testimonials to this. We have discovered
that passing landmark economic and social legislation could be the
relatively easier part of improving the quality of American life. M~k-
ing the programs work-and avoiding harmful side effects that could
nullify the benefits-is infinitely more difficult and calls for a strength
of will and devotion to achieving success-and willingness to sacrifice,
as in paying necessary taxes, we have not seen yet. New approaches
are needed placing heavier reliance on the private sector, on States,
and on local governments to utilize far more effectively the allocated
Federal resources.
The 1970 budget is still woefully out of tune with the country's
needs, and one of the greatest challenges of the new administration
and the 91st Congress will be a reordering of our national priorities
and enactment of legislation and appropriations based on agreed pri-
orities. While proposed defense expenditures continue to rise, funds
allocated for the crisis of the cities remain grossly inadequate. The
fiscal year 1970 budget suggests that more than twice as much will be
spent on farm price supports than on community development and
housing; that more than twice as much will be spent on interstate high-
ways than on urban mass transit, and that we are to spend no more in
the coming year on water pollution than in the previous 2 years. The
loan guarantee program to encourage the construction of academic
facilities for higher education is proposed to be used as a replacement
for, rather than as a supplement to, Federal grants and loans. While
the President advocates higher education for all, the budget cuts back
on National Defense Education Act loans for low income students. And
I could go on and on.
The great failure of economic policy in the 1960's was the delayed
implementation of a substantial measure of fiscal restraint-the failure
to increase Federal income taxes in time to head off serious price infia-
Lion. The President's Economic Report blames the Congress for a tardy
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response to the administration's request for tax action, but I respect-
fully submit that no real administration muscle was used in the drive
for it.
I would also remind the administration t.hat long before it began to
support a tax surcharge, the minority members of this committee
warned that fiscal restraint was essentia.l to maintain and moderate
economic expansion. While the administration manipulated the time
stream of Government revenues, pressured labor and business to com-
ply with wage-price guidelines and secured the suspension of the 7 per-
cent tax credit-a device to stimulate the expansion and growth of our
productive ca.pacity-we continued to point out that these makeshift
measures merely postponed the day of judgment.
Further, had the administration vigorously campaigned for the tax
surcharge it proposed a.nd willingly considered the reservations we in
Congress expressed, we could have avoided the terrible legacy of
accelerated inflation left for the new administration.
But what remains unfinished by the old administration is a challenge
to the new. Where the President's Economic ~Report looks longingly
at past achievements-and that is their warranty-we must be con-
cerned with the future. Where the old administration recites the suc-
cesses of economic policy, we must examine and rectify its failures.
For it is not in past achievement, that the future can be secured, but
only by what we do here and now and in the coming months and years.
Thank you so much, Mr. Chairman.
,Chairman PATMAN. Mr. Ba.rr, you are recognized. You may proceed,
sir. Joseph W. Barr, Secretary of the Treasury. We are glad to have
you.
STATEMENT OF RON. JOSEPH W. BARR, SECRETARY OF THE
TREASURY
Secretary BARR. Thank you, Mr. Chairman.
\~Tith your indulgence, Mr. Chairman, I would like to say just a few
personal words, sir.
Mr. Chairman, you have served in this Congress for many, many
years and you have done many great things, but I cannot think that
anything you have done in your career is as crucially important as
your work with the late Senator Taft in establishing this committee
and in establishing the Council of Economic Advisers to serve the
President of the United States.
I have been an insider and outsider, Mr. Chairman, as you know.
I have been on both ends of Pennsylvania Avenue. This is a prestigious
committee that attracts some of the best minds in `the Congress. The
Council of Economic Advisers, almost since its inception, has attracted
some of the best minds in this country. Mr. Burns, Mr. Saulnier, Mr.
Heller, Mr. Ackley, and now my distinguished colleague, Mr. Okun.
These men may disagree but their degree of professionalism, Mr.
Chairman, is superb.
I will submit, sir, that in your long career there is nothing that you
have done for this country that has had a more lasting benefit.
Now, Mr. Chairman, on a slightly more personal note, you may be
dismayed to read in the papers this morning that I am going to leave
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the Treasury and move across the street and become a banker.
[Laughter.]
Mr. Chairman, in my own defense-I served with you, sir, and I
think you will admit the record shows that I am not a very good
politician. I was promptly defeated after my first term in office and I
go to banking secure in the knowledge, Mr. Chairman, that you are
going to keep me honest. [Laughter.]
Senator JAVIT5. Mr. Chairman, may I on behalf of the minority, wel-
come the chairman to his present post and join with Secretary Barr in
the satisfaction we all derive from this great committee and what it
is able to accomplish guiding our people and our Government, and
express my personal thanks, and I know every member of the minority
feels the same way, to Representative Patman for his unfailing
courtesy.
Chairman PATMAN. Thank you, Senator.
Senator JAvITs. And also while I have got the floor, briefly I want to
again thank our own colleague, Senator Proxmire, for his very gifted
incumbency and the tact and kindness with which he conducted the
chair during the past 2 years.
Senator PRoxMI1u~. Thank you very much.
Secretary BARR. Mr. `Chairman, may I warn you that if this sounds
a bit more like a stump speech than `a statement by the Secretary of the
Treasury, that is precisely what it is intended `to be.
With that warning, let me plunge in.
First of all, Mr. Chairman, what I will say now is not in my formal
statement. After I was defeated in the Congress and I joined the
Treasury with Secretary Dillon under President Kennedy, there was
one fire that really burned in my belly and that was to do something
about the economic slack that prevaded this country. I thought we
could do more in order to use our productive capacity, our labor, and
our savings more efficiently.
Mr. Chairman, that agenda item is finished. We are doing all we can
and probably more. Mr. Zwick and Mr. Okun later will inform you
tha't we are perhaps trying to do too much today. So the agenda item
on which I came in is behind us.
The new agenda item, the one in which I ask your support for the
new Secretary-designate, is to help cool off this economy, to bring
our prices back into a. more adequate relationship without throwing
the country in'to a tailspin.
Now, gentlemen and Mrs. Griffiths, this is a tricky business, and I
do not want to sound too nonpartisan here today, but it is going to take
the best judgment of all of you and the new administration to
accomplish this extremely difficult task.
Now, what are the agenda items that I, after a decade of public
service, would like to call to your attention-the unfinished items that I
would like to call to your attention.
First of all, Mr. Chairman, I think the greatest unfinished agenda
item is that we have not been able to do more on tax reform. Mr.
Chairman and members of the Joint Economic Committee, I will haz-
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ard a guess that there is going to be a taxpayer revolt over the income
taxes in this country unless we move in this area.
Now, the revolt is not going to come from the poor. They do not pay
very much in taxes. The revolt is going to come from the middle class. It
is going to come from those people with incomes from $7,000 to
$20,000 who pay every nickel of taxes at the going rate. They do not
have the loopholes and the gimmicks to resort to, Mr. Chairman.
However, when these people see, as I see, that in the year 1967, there
were 155 tax returns in this country with incomes of over $200,000 a
year and 21 returns with incomes of over a million dollars for the
year on which the "taxpayers" paid the U.S. Government not 1 cent
of income taxes, I think those people are going to say it is time to do
something about it and I concur.
Now, we have tried for 8 years to reform the tax system and we have
made some dent in the problem. May I encourage this committee to
keep up the impetus that it has always had in this area of tax reform.
We have a good tax system. Economically it works as a counter-
cyclical force. It is working that way right now. When the economy
starts running stroiiger than it. should, the tax system soaks up excess
demand and tends to cool off the economy. It is a magnificent system
that is producing in the income tax area alone $132 billion in this
fiscal year.
Mr. Chairman, and members of the committee, this is a voluntary
system. It will not work unless people support it. Mr. Chairman, I do
not believe the problem is the level of taxation. I believe rather it is
the equity of taxation. People want to feel they are not paying more
than their share and that everyone should pay a fair share. This does
not ha.ppen when you are running a corporation and you look at the
interna.tional oil companies and see they pay little or no taxes. They
pa.y huge taxes including royalties to other governments but not to
this Government, Mr. Chairman.
You look around and you see many people with huge advantages.
Now, these are difficult to terminate. These special tax provisions are
controversial subjects, Mr. Chairman, but I submit that if we are
going to mantain this magnificent tax system with its advantages for
revenues, and provide the revenues that Senator Javit.s mentions that.
lie wants to use in the cities and the rest of you want to use for various
purposes, it must be a fair system.
Senator JAVITS. Mr. Chairman, I have one question that is so perti-
nent that I beg leave of the Chair to ask it..
Chairman PATMAX. You may proceed, Sena.tor.
Senator JAVITS. It is a fact that the surcharge bill included a re-
quirement for the President to submit a report on tax reform by
December 31, 1968.
Secretary BARR. Right, sir.
- Senator JAVITS. It is also a fact that on December 31, the President
announced with the concurrence of Chairmen Mills and Long, that
lie will not submit such a report although the Treasury's recommenda-
tions would be available to Congress in confidence on request. I was
talked to in advance of the date, and asked whether I would consent to
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its being submitted as a confidential document. I did not feel I was able
to do that but I did not wish to embarrass the outgoing President and
make him take responsibility for tax reform proposals which he could
not carry on. I understood his desire, though I could not accord with it,
and I have asked that at least the staff report be made public.
Now, is it a fact-and please do not answer, Mr. Secretary, unless~
you feel able to-
Secretary BARR. I am prepared to answer that. I knew you were
going to ask it and I have the answer.
Senator JAVITS. I do not want to embarass you but can you tell us
if the report has been requested by members of the proper committees
of the Congress which I understand is the President's willingness?
Will then, the report be made available generally?
Secretary BARR. Senator, in the past week I have had abo~it as much
pressure from the Congress for this data as I have ever had in my
life, including a request from the vice chairman of this committee.
The pressure was so great that I called the chairman of the Ways and
Means Committee, who is now chairman of the Joint Committee on
Internal Revenue Taxation, and said that I did not like to leave public
office turning down requests from Members of Congress for data that
should be available to them.
He convened a meeting of the Joint Committee on Internal Revenue
Taxation. Secretary-designate Kennedy accompanied me to this meet-
ing and it was agreed at this meeting that when the Ways and Means
Committee is organized next week, Ways and Means will transmit a
request to Secretary-designate Kennedy for the information. They
will then publish it as a committee print. Secretary-designate Kennedy
and I both agreed to this proposal.
Senator JAYITS. Thank you very much, Mr. Secretary. This is most
reassuring.
Chairman PATMAN. Very well then-after the three of you finish
your statements we will then ask you questions.
Secretary BARR. Now, may I move ahead, Mr. Chairman, to another
subject. Over the past 8 years I have had a growing concern that in
the area of trade, the TJnited States is disadvantaged in exports be-
cause of our tax system compared with the tax systems of other na-
tions. I have been concerned because I felt that an export, let us say
a Caterpillar tractor, leaves the United States carrying all the burden
of our tax load when it moves into export trade, while the same item
of equipment as it leaves Germany or France is exempted from a large
share of the tax load that is imposed in those nations. 15.5. products
such as automobile, cigarettes and alcoholic beverages, on which the
Federal Government levies excise taxes, are exempt from the excises
if exported.
Now, I can only confess that the academicians have not agreed with
me in many instances but I do believe that the events of last Novem-
ber-when Germany reduced its border tax adjustments and France
increased its border tax adjustments for the purpose of reducing trade
imbalances would tend to lend credence to what I have thought, and
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I may add that Secretary Dillon and Secretary Fowler have shared the
opinion that we had to do something in this area.
Now, may I suggest, sir, that I do not believe you need to go to a
value added tax or some other form of a national sales tax to achieve
this objective. I do not think you need to do that. I do think this
committee should consider carefully in conjunction with other com-
mittees whether or not this Nation should impose border tax adjust-
ments whereby, as our exports leave, there will be a. payment to the
exporter and as imports come in, there will be a tax. This would tend
to equalize our tax system with the systems of other nations relative
to exports and imports.
Now, let me warn you, I do believe such border taxes must be under
strict international control or you will end up with a protectionist de-
vice. On the other hand, may I say to the committee as bluntly as I
can, that I think we are at a disadvantage in exports because of the
way the present international rules apply to different tax systems and
this should be corrected, sir.
Thirdly, we now have nearly completed the special drawing rights
facility which your committee, the committee on which you and Mr.
Widnall sit, the Banking and Currency Committee considered and
the House and Senate approved last year. Not enough countries have
ratified the agreement yet to bring this facility into force. May I urge
you, sir, and this committee, to keep up an unrelenting pressure on
the powers that be, to try to get this special drawing rights facility
ratified so the world has an opportunity to create the reserves that
it needs to keep international trade and finance and exports moving.
I think it is crucially important and I would hope that it would
come into being soon.
Mr. Chairman, I also want to call to your attention the fact that
the Congress has still not acted on the request for funds for the
International Development Association. I have watched this arrange-
ment since I was a member of Congress. I helped prepare the legis-
lation that first created IDA. I have watched it for 8 years.
I think, Mr. Chairman, this is the way the American people want
to move in assistance to developing nations. They want to share the
burden with other industrial nations. I would urge the Congress to
move as promptly as possible in this crucial area.
And lastly, Mr. Chairman, I want to submit for the analysis of
this committee, and especially its staff, a study of tax expenditures
which the Treasury has completed, presented in chart form, and called
"Comparison of Budget Outlays and Tax Expenditures by Function,"
together with a supplementary statement entitled "Ta.x Expenditures:
Government Expenditures Made Through the Income Tax System."
Now, I have not had an opportunity to go into this deeply, but the
Treasury staff in this report, concludes that through the tax system,
not by appropriations, but through special provisions in the tax
system, similar in effect to appropriations, we are now making avail-
able huge sums of money to various functional sectors of the budget.
You have the chart here in front of you. If you want to pick it up
I wifi leaf through it very quickly.
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Now, this is done on a functional basis the way the budget is
established. You will see that for national defense chart 1, there is
a little benefit under the tax code. You would ask where does that
come from? Well, it comes from the fact that certain housing and
other allowances for military personnel are nontaxable.
International affairs and finance, chart 2-you will find an explana-
tion on the cover side as I flip through these charts-you will find
that the Congress is appropriating $3.7 billion, and there is about
a half billion dollars, running through the tax code.
Now, part of that arises from the fact that you can live overseas
and the first $20,000 or $25,000 of your income is exempt from taxation.
The other is various forms of corporate exemptions built into the code.
Agriculture and Agricultural Resources, which is chart 3. You will
find that there are special provisions in the tax code that provide about
a billion dollars in tax expenditures versus $5.2 billion in budgetary
expenditures.
You will find under Natural Resources-chart 4-that the U.S.
Government appropriates about $1.9 billion a year in the most recent
years. The total that ran through the tax expenditure side was $1.7
billion.
In Commerce and Transportation-chart 5-you will find that the
budget outlays which you voted are $9 billion. The tax expenditure
item is $9.7 billion.
Community Development and Housing is chart 6. The budget outlays
total about $2.8 billion a year, the tax expenditure item total $5.2
billion.
Health and Welfare, chart 7. Budget outlays are about $55 billion
a year; tax expenditures are roughly $19.5 billion.
For education and Manpower, chart 8, the budget outlays are $7.9
billion, tax expenditures are $900 million.
Veterans Benefits and Services-chart 9.-Budget outlays are about
$7.8 billion, tax expenditures are $700 million.
The study adds two other headings to cover tax expenditures which
do not fit under functional headings in the Federal Budget:
Aid to State and Local Government. Financing involves tax
expenditures of $4.6 billion.
Capital Gains-Individual Income Tax have a tax expenditure
cost in the range of $5.5 to $8.5 billion.
Mr. Chairman, let me alert the committee to the fact that this is
a highly controversial study. It is based on carefully drawn assump-
tions by the Treasury staff. I submit this not as the last word, but a
carefully done staff study to provide additional information which
I think this committee should have available to it. You can examine
and discuss it as you see fit.
Chairman PATMAN. Without objection, they will be placed in the
record at this point.
(The documents referred to follow:)
1. Comparison of Budget Outlays and Tax Expenditures by Function.
2. Supplementary Statement-Tax Expenditures-Government Expenditures
Made Through the Income Tax System.
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@jtIF ~
E~y ~
~s& Y~r `K!~
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Table 1. National Defense
Tax expenditures (in millions of doU.ars) 1968
Exclusion of military benefits and allawances 500
Budget outla~_~us tax~p~pditures (in billions of dollars)
1968 1969 1970
Budget outlays:
Expenditures 80.5 81.0 81.5
Net lending * * *
Total 8o.5 ~ 81.5
Tax expenditures 0.5 0.6 0.6
Total budget outlays plus tax expenditures &1.0 ~31T~ H2.1
Tax expenditures as percent of budget outlays 1% 1% 1%
*Less than $50 million.
PAGENO="0017"
60
40
20
0~-
R~at~on~ 1U~ef~se, tF~sc~ 11~11D
0
Billions of Dollars
80
$ 81.5
Tax
Expenditures
are
1% of Budget
Outlays
Budget Outlays
$0.6
Tax Expenditures
SOURCE: DATA FROM THE BUDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
Ch~wt I
PAGENO="0018"
Table 2. I nternational Affairs and Finance
~x~,~nditures j~n millions of do11ar~ 1968
Individual taxation:
Exemption for certain income earned abroad by U. S. citizens ~
Exclusion of income earned in U. S. possessions 10
Corporate taxation:
Western Hemisphere trade corporations 50
Exclusion of gross-up on dividends of less developed
country corporations 50
Exclusion of controlled foreign subsidiaries 150
Exclusion of income earned in U. S. possessions - 70
Total tax expenditures 310
Budget outlays plus tax ex~penditures (in billions of dollars)
Budget outlays: ~ 1969 1970
Expenditures 3.7 3.6 3.5
Net lending 0.9 0.3 0.2
Total 3.9 3*7
Tax expenditures Q.)4 O.~4 0.5
Total budget outlays plus tax expenditures 5.0 1i..3 1~ .2
Tax expenditures as percent of budget outlays 9% 10% 1)4%
PAGENO="0019"
tern~t~~ AH~irs ~n~1 EFh~ance, ~9sc~ ~J11Ui
Billions of Dollars
A
2
Tax Expenditures are
14% ~f Budget Outlays
$0.5
Tax Expenditures
$ 3.7
3-
01
Budget Outlays
SOURCE: DATA FROM THE BUDGET OFTHE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF.THE TREASURY ESTIMATES~
Chart 2
PAGENO="0020"
Table 3. ~i culture and Agricultural Resources
Tax ~x~enditure s (in ml iii ons of dollars) 1968
Farming: Expensing and capital gains treatment 800
Timber: Capital gains treatment for certain income ____
Total tax expenditures
Budget outlays:
Expenditures
Net lending
Total
Tax expenditures ____ ____
Total budget outlays plus tax expenditures
Tax expenditures as percent of budget outlays
Bud~t outlays plus tax ~çpenditures (In billions of dollars)
1968 -~ 1969 19T0
930
t~.8 5.3
1.1 .0.1
~
0.9
6.B
15%
5.1
0.1
5.2
1.0
6.2
19%
1.0
19%
PAGENO="0021"
A~c~R~re ~nd A~jricuRiua~ R~sotuc2s, Fisca' 1910
Billions of Dollars
6
$ 5.2
Budget Outlays Tax Expenditures
SOURCE: DATA FROM THE BUDGET OF THE U.S. GOVERNMENT,1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
Chart 3
PAGENO="0022"
Tab1e~. Natural Resources
Tax ~nditure s kin millions of dollars) 1968
Expensing of exploration and development costs 300 1/
Excess of percentage over cost depletion 1,300 ~/
Capital gains treatment of royalties on coal and iron ore 5 -
Total 1,605
Budget outlays plus tax expenditures (in billions of dollars)
____ l96~5 1970
Budget outlays:
Expenditures 1.7 1.9 1.9
Net lending ____ .xi ____
Total 1.7 1.9 1.9
Tax expenditures 1.6 1.7 1.7
Total budget outlays plus tax expenditures 3.3 3.6 3.6
Tax expenditures as percent of budget outlays 9I~.% 90% 90%
1/ In the absence of the expensing of exploration and development costs and
percentage depletion, the first year revenue effect would be $750 million
and $i.s billion, respectively. The difference from the estimates shown
which are based on long-run effect is due to the fact that taxpayers with
mineral properties would initially have little or no tax basis because of
deductions in prior years.
*Less than $50 million.
PAGENO="0023"
Billions of Dollars
2-~
~1~taBr~1U E~s~o~ces
3/4_
1
1/2_
Tax Expenditures are
90% of Budget Outlays
~fl
Budget Outlays
SOURCE~ DATA FROM THE BUDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
Tax Expenditures
Chart 4
PAGENO="0024"
Table 5. Commerce and Transportation
Tax expenditures (in millions of doflars) 1968
Investment credit 2,300
Excess depreciation on buildings 500
Dividend exclusion 225
Capital gains: Corporations (other than Agricultural
and Natural Resources) 500
Excess bad debt reserves of financial institutions 6oo
Exemption of credit unions ~40
Deductibility of interest on consumer credit 1,300
Expensing of research and development expenditures 500
$25,000 surtax exemption 1,800
Deferral of tax on shipping companies 10
Total 7,775 i/
Budget out1~ys plus tax expenditures (in billions of dollars)
!2~ ~ 1970
Budget outlays: -
Expenditures 7.8 8.1 8.9
Net lending 0.2 * 0.1
Total ~ ~Ti ~T~5
Tax expenditures S ~jJ~ _.~ _jj~
Total budget outlays plus tax expenditures 15.8 17.3 18.7
Tax expenditures as percent of budget outlays 98% 1124% 108%
i/ The revenue cost for 1968 under this category differs from that in
Exhibit 29 of the Secretary's Annual Report due to the exclusion of
capital gains - individual and its presentation as a separate item in
this revised analysis.
*Less than $50 million.
PAGENO="0025"
Billions of Dollars
IC'
Commerce and Transportation
8
6 I
4 I
2 I
Tax Expenditures are
108% of Budget Outlays
Or
`Budget Outlays
SOURCE: DATA FROM THE.3UDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
Tax Expenditures
Chart 5
PAGENO="0026"
Table 6. Community Deve~pment and Housin~
Tax ~ç~enditures (in millions of dollars) 1968
Owner-occupied homes, deductibility of:
Interest on mortgages 1,900
Property taxes 1,800
Rental housing - excess depreciation 250
Total 3,950
Budget outlays plus tax expepditure s tin billions of dollarg
1968 1969 1970
Budget outlays:
Expenditures 1.0 1.3 2.6
1~et lending 3.1 1.0 0.2
Total 2.3 ~
Tax expenditures 11.0 11.7 ~
Total budget outlays plus tax expenditures ~8~i 7.0 8.0
Tax expenditures as percent of budget outlays 98% 2014% 186%
PAGENO="0027"
m~iiuo~~ity ~~eu~t ~ ~~s5u~j, ~F~scaO 1I~iO
Billions of Dollars
6
$5.2
~ Tax Expenditures are
186% of_Budget_Outlays _______
3 $2.8
2
I
0
4.
Budget Outlays Tax Expenditures
SOURCE: DATA FROM THE BUDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
Chart 6
PAGENO="0028"
24
Table 7. Health and Welfare
Tax expenditures (in millions of dollars) 1968
Aged, blind, and disabled:
Additional exemption, retirement income credit and
exclusion of OASDItE for aged 2,300
Additional exemption for blind 10
Exclusion for sick pay1 85
Exclusion of unemployment insurance benefits - 300
Exclusion of ~orkmenTs compensation benefits 150
Exclusion of -public assistance benefits 50
Exclusion for employee pensions 3,000
Deduction for self-employed retirement 60
Exclusion of other employee benefits:
Premiums on group term life insurance ItOO
Accident and death benefits 25
Medical insurance premiums and medical care 1,100
Privately financed supplementary unemployment benefits 25
Meals and lodging 150
Exclusion of interest on life insurance savings 900
Deductibility by individuals of charitable contributions
(other than education) including untaxed appreciation 2,200
Deductibility of medical expenses 1,500
Deductibility of child and dependent care expenses 25
Deductibility of casualty losses 70
Standard deduction 3,200 1/
Total 15,550
Budget outlays plus tax expenditures (in billions of dollars)
1968 1969 1910
Budget outlays: - - -
Expenditures !~3.14 149.5 55.0
Net lending 0.1 -0.6 *
Total I~T~ 1~ 55.0
Tax expenditures 15.6 18.0 19.5
Total budget outlays plus tax expenditures 59.1 ~ ~TiT~
Tax expenditures as percent of -budget outlays 36% 37% 36%
1/In the absence of the 10 percent standard deduction and most itemized non-
business deductions, the minimum standard deduction as presently structured
~iould be taken by all taxpayers and its revenue cost vould be relatively
large. Under present treatment, the minimum standard deduction, in keeping
vith its objectives, is ~laimed almost entirely by low-income taxpayers and
its revenue cost is $300 million. The revenue estimate assumes the mini-
mum standard deduction is desigeed to assist only low-income taxpayers.
The minimum standard deduction is regarded in this analysis as related to
the system of personal exemptions and thus a part of the structure of an
income tax system based on ability to pay, rather than as a tax expenditure.
~ than $50 million.
PAGENO="0029"
Billions of Dollars
60
~1i~ ~:i~ ~ ~C~cr~O ~1tII~
45
30
15
o-~-
Budget Outlays
SOURCE: DATA FROM THE BUDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
Tax Expenditures are
36% of Budget Outlays
$ 19.5
Tax Expenditures
Chart 7
PAGENO="0030"
Table 8. Education and Ma~power
Tax e~çp~nditures (in millions of dollars)
Additional personal exemption for students 500
Deductibility of contributions by individuals to
educational institutions 170
Exclusion of scholarships and fellowships 50
Total 720
Budget outlays plus tax expenditures (in billions of dollars )~
1968 1969 1970
Budget outlays:
Expenditures 6.6 6.9 7.6
Net lending O.t~ 0.3 0.3
Total 7.0 7.2 7.9
Tax expenditures 0.7 0.8 0.9
Total budget outlays plus tax expenditures 7.7 8.0
Tax expenditures as percent of budget outlays 10% 11% 11%
PAGENO="0031"
~E~c~ition ~1ll~J ~~DD~ftrer
Billions of Dollars
8 __________________
$79
6
Tax Expenditures are
_______ 11% of Budget Outlays
4
2
$09
0 E~1
Budget Outlay Tax Expenditures
SOURCE: DATA FROM THE BUDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES. Chart 8
PAGENO="0032"
Table 9. Veterans Benefits and Services
Tax e~enditures (in millions of dollaDs) 1968
Exclusion of certain benefits 550
Budget out1ay~~1us tax e~çpenditures (in billions of dollars)
1968 1969 iTO
Budget outlays:
Expenditures 6.7 ~
Net lending 0.1 0.3 ____
Total 7.1 7.8
Tax expenditures 0.6 o.6 0.7
Total budget outlays plus tax expenditures 8.3 5.5
Tax expenditures as percent of budget outlays 9% 8% 9%
~ than $50 million.
PAGENO="0033"
0
Billions of Dollars
8
Veterans Benefits and Services
Tax Expenditures are
9% of Budget Outlays
0
Budget Outlays
SOURCE: DATA FROM THE BUDGET OF THE U.S. GOVERNMENT, 1970 AND
THE DEPARTMENT OF THE TREASURY ESTIMATES.
6
4 -
2
$0.7
Tax Expenditures
Chart 9
PAGENO="0034"
Table 10. Aid to State and Local Government Financing
Tax expenditures ~(in ml lions of dol1~j
Exemption of interest on State and local debt obligations i,800
Deductibility of nonbusiness State and local taxes
(other than on owner-occupied homes): 1/
Individual income tax 1,350
General sales taxes 775
Gasoline taxes
Personal property taxes 150
Other taxes 125
Total
Property taxes on owner-occupied homes (included
under Community Development and Housing) l~,8oo
Total - All State and local nonbusiness taxes
17 For businesses owned by individuals, taxes other than income taxes
are considered a cost of doing business and thus deductible in arriving
at a net income figure.
PAGENO="0035"
AID TO STATE AND LOCAL GOVERNMENT FINANCING
The Federal Government aids State and local government financing
through certain tax provisions. These take two forms: (1) the
itemized deductions for nonbusiness State and local taxes; (2) the exemption
from Federal income tax of interest on State and local government
obligations. . The revenue costs to the Federal Government of these
special tax provisions are shown in Table 10. There is no single
functional category in the present Federal budget for aid to State and
local government financing, and thus there is no chart for this item.
CAPITAL GAINS - INDIVIDUAL INCOME TAX
The tax expenditures involved in the present treatment of capital
gains of individuals are placed in the range of $5.5 to $8.5 bfl.lion.
This revenue cost includes the exclusion from inco~ne tax of appreciation
on assets transferred at death, the exclusion of half the gains from the sale
of capital assets held more than six months, and the maximum rate of 25
percent. No table or chart is shown for this heading, because these tax
expenditures would fall under a variety of functions in the Federal budget,
including commerce and transportation, agriculture and agricultural re-
sources, community development and housing, and health and welfare.
Available data, however, do not provide a basis for accurate distribution
among these functions. Thus, to avoid having to choose any single
predominant category but to identify the importance of this special pro-
vision, a new heading outside any budget classification is included for
this item.
Separation of this item from the budget classifications leads to an
understatement of the amounts of tax expenditures for the functional
categories affected.
PAGENO="0036"
32
SUPPLEMENTARY STATEMENT OF JOSEPH W. BARR
TAX EXPENDITTJRES: GOVERNMENT EXPENDITURES MADE THROUGH THE INCOME TAX
SYSTEM
The Annual Report of the Secretary of the Treasury for fiscal year 1968 in-
cludes an exhibit which presents Government expenditures for 1968 made
through the income tax system (Exhibit 29). The availability of the budget for
fiscal year 1970 enables us to present an updating of tax expenditures to cover
the fiscal years 1968, 1969, and 1970 on a basis consistent with the 1970 budget
data and classifications. The following statement is a condensed and revised
version of the exhibit in the Secretary's 1968 Annual Report with the updated
figures.
PURPOSE OF ANALYSIS
This analysis extends the budget to include Government expenditures made
through the income tax system. The present Federal income tax structure con-
tains a large number of special deductions, credits, exclusions, exemptions, and
preferential rates designed to achieve various social and economic objectives.
Most of these special provisions serve ends similar in nature to those served by
direct Government expenditures or loan programs, and they affect the private
economy in the same way. In a specific functional area the Government may have
direct expenditures, direct Federal loans, Federal insurance or guarantees of
private loans, and interest subsidies which represent alternative methods of ac-
complishing the purpose which the special tax provision seeks to achieve or en-
courage. This analysis, together with the fuller presentation in the Secretary's
Annual Report, will permit a better understanding of the amount and allocation
of resources on both the outlay and revenue side of the 1970 budget.
A tax expenditure has the same impact on the budget surplus or deficit as a
direct increase in expenditures. The tax revenues which the Government does
not collect because of these special tax provisions, however, are not reported in
the budget as presently constituted. The absence of line items-either on the
receipts or outlays side of the budget-for these revenue losses thus results in
an understatement of tl1e role of Federal Government financial influence on the
behavior of individuals and businesses and on income distribution. In many
areas the magitude of tax expenditures approaches and, in some instances, ap-
proximates direct outlays having the same objective.
Tax expenditures are not disclosed in the budget and therefore are not subject
to careful aimual scrutiny in the budget and appropriation process. Budget out-
lay decisions, on the other hand, involve the departments and agencies, the
Bureau of the Budget, the House and Senate program committees w-hidh are
competent and experienced in their specialized fields, and the appropriation com-
mittees. Tax expenditures are not generally coiisidered by the program depart-
ments and congressional committees concerned, and are not reviewed annually or
periodically to measure the benefits they achieve against the amounts expended.
The purpose of this analysis is to present information which compares tax
expenditures with direct expenditures or loan programs in various functional
areas and thus to clarify and present more fully the role of the Federal Govern-
ment in these areas Such a comparison should be helpful in the allocation of
public resources.
A few illustrations will indicate how tax expenditures are alternatives to di-
rect expenditures or Government lending programs. Under the functional cate-
gory of health and welfare, the budget lists large direct expenditures which bene-
fit the aged. In addition, $2.3 billion was expended in 1968 through the tax
system to aid the elderly.
Direct expenditures for natural resources are itemized in the budget. To these
should be added the $1.6 billion assistance the tax system provides these indus-
tries by permitting the expensing of certain capital costs, the use of percentage
depletion in excess of cost depletion, and special capital gains treatment for iron
ore and coal royalties. .
In the field of housing the Government now provides direct subsidies to lower
the interest rates on mortgages paid by buyers of certain homes. Homeowner-
ship is also subsidized through the tax deductions for interest paid on home
mortgages and for property taxes on homes which now cost the Government an-
nually about $1.9 billion and $1.8 billion, respectively.
PAGENO="0037"
33
SCOPE OF TAX EXPENDITURES
Some of the special tax provisions cause revenue to be lost to the Government
forever because the current tax base or the tax rates are reduced without any
offsetting increase later. Such tax expenditures correspond closely to direct
expenditures.
Other special tax provisions serve to defer the time when the taxes will be
paid. For a particular taxpayer, transaction, or asset, the special provision may
really represent a deferral of tax. However, for stable or growing businesses
with an indefinite life, for the Government, and for the entire economy, the de-
ferral of taxes continues forever under most of these provisions; furthermore,
in an expanding economy the aggregate amount of deferred taxes tends to grow
year after year. Examples of special tax provisions which cause deferral of taxes
include: Deduction of employer and self-employed contributions to private pen-
sion plans and exemption of investment income of such plans; accelerated de-
preciation deductions on buildings; net inconie reinvested in ship construction
and renovation by certain shipping companies; expensing of capital costs in ag-
riculture and natural resource industries; and exclusion of nonrepatriated earn-
ings of foreign subsidiaries.
Special tax provisions, which serve to defer but not forgive tax payments,
might be compared to net lending in budget terminology. These special tax pro-
visions are generally open-ended, with the extent and duration of their use
largely at the taxpayers' option. For these reasons, the tax expenditui~e classifi-
cations in this analysis do not separate the special provisions which reduce taxes
from those which defer taxes.
This analysis does not attempt a complete listing of all the special tax provi-
sions. Various items have been excluded for one or more of several reasons:
(a) Some items were excluded because there is insufficient information
available on which to base a sound estimate. For example, in the case of de-
preciation on machinery and equipment, accelerated tax methods may provide
an allowance beyond that appropriate to the measurement of net income but
it is difficult to measure that difference because the true economic deterior-
ation or obsolescence factor cannot be readily determined.
(b) Some items were excluded where the case for their inclusion in the
income base stands on relatively technical or theoretical tax arguments.
The imputed rent on owner-occupied homes, for example, involves not only
a conceptual problem but difficult practical problems of measurement.
(c) Some items were omitted because of their relatively small quantitative
importance.
Other features of our income tax system are considered not as variations from
the generally accepted measure of net income or as tax preferences but as a part
of the structure of an income tax system based on ability to pay. Such features in-
clude personal exemptions and the rate schedules under the individual income
tax.
It must be recognized that the exclusions from the listing are to some extent
arbitrary. The objective of this analysis is to provide a list of items that would
be generally recognized as an intended use of the tax system to achieve results
which are now, or could be,, achieved through direct Government expenditures.
The design of this list seems best served by constructing a minimum list rather
than including highly complicated or controversial items that would becloud the
utility of this analysis.
TAX EXPENDITURES BY FUNCTIONAL CATEGORY
The tax expenditures resulting from the various special tax provisions are~
classified under the functional categories used in the budget. In most cases, par-
ticular special tax provisions which affect more than one budget category have
been classified in the one where the effect is most important. In a few cases
where the amount is large and the allocation relatively clear, the tax expendi-
tures are divided between two functions.
No significant tax expenditures are made in three budget categories, space,
interest, and general government and others. Two classes of tax expenditures (aid
to State and local governments and capital gains-individual) which involve
large amounts have not been assigned to specific functional categories for the
reasons given in those sections of the analysis.
PAGENO="0038"
34
All estimates of tax expenditures resulting from special tax provisions rep-
resent revenues lost on an annual basis. The estimates of revenue foregone are,
in general, based on the assumption that such provisions never existed, or, alter-
natively, that such provisions have been withdrawn sufficiently long ago that we
are now beyond the period needed to permit an equitable transition to a new
tax situation.
The revenue cost estimated for these special provisions is not in many cases the
revenue change which would result in the first full year if these provisions
were withdrawn. Replacement of some or all of these provisions by direct ex-
penditures or lending programs might change the level and composition of eco-
nomic activity. The revenue cost of each special tax provision presented for 1968
would, of course, generally vary over time with growth in the economy and
changes in various parts of the tax base. Also, a realistic approach to any change
in these provisions would provide in many situations transition arrangements
which would effect the revenue change gradually over a period of years.
Another key assumption is that economic activity for the year would not have
been affected by the absence of these special provisions. This, of course, is a simp-
lifying assumption for tax expenditures undoubtedly have significant effects on
the composition and perhaps the level of economic activity. Also, in the absence
of these tax benefits, there would doubtless have been changes in Government
direct spending and net lending to accomplish some of the objectives of the ex-
isting provisions. No attempt has been made to speculate how the budget and
the economy might differ if none of these provisions were in the law.
No account is taken here of other taxes, such as payroll taxes, estate and gift
taxes, excises, or tariffs. The assumption inherent in current law, that corpora-
tions are separate entities and subject to income taxation independently from
their shareholders, is adhered to in this analysis.
The tax expenditures shown here for the three fiscal. years 1968, 1969, and 1970
are figured at the tax rate which affect the revenues in these years.
A brief description of each of the special tax provisions for which a tax ex-
penditure estimate is shown accompanies the estimates.
National Defense
The supplements to salaries of military personnel by provision of quarters and
meals on military bases and off-base quarters allowances for military families,
and virtually all salary payments and reenlistment bonuses to military person-
nel serving in combat zones are excluded from tax.
TABLE 1.-NATIONAL DEFENSE
Tax expenditures, 1968
Un millions of dollarsi
Exclusion of military benefits and allowances 500
Budget Outlays Plus Tax Expenditures
[In billions of dollars)
1968 1969 1970
Budget outlays:
Expenditures 80.5 81.0 81.5
Net lending (1) (1)
Total 80.5 81.0 81.5
Taxexpenditures .5 .6 .6
Total budget outlays plus tax expenditures 81.0 81.6 82.1
Tax expenditures as percent of budget outlays 1 1 1
I Less than $50,000,000.
Intern~tionai Affairs and Finance
Individval ta~vation -For citizens of the United States, income earned abroad
up to $20,000 for each complete tax year is exempted from taxation if the tax-
payer is a bona fide resident of a foreign country for an uninterrupted period
that includes 1 full tax year or, if he is present there 510 days during a period
of 18 consecutive months. After 8 ye~l'0, for@ign re~li1ent t~payers can ex-
clude up to $25;000 a tax year.
PAGENO="0039"
35
United States citizens receiving from sources in a U. S. possession may, under
certain conditions, exclude such income from tax.
Corporate taa,ation.-Domestic corporations which qualify as Western Hemis-
phere Trade Corporations are entitled to a special deduction which reduces their
tax rate by 14 percentage points.
Income of foreign branches and subsidiaries of U. S. corporations is subject
to taxation abroad and in the United States. A credit is allowed against U. S. in-
come tax for the foreign income taxes paid, up to the amount of U. S. tax lia-
bility. U. S. corporations deriving income from foreign subsidiaries may claim
a credit for foreign corporate profits tax deemed paid on that income, as well as
for foreign taxes imposed directly on that income. If the subsidiary is in a
developed country, the parent corporation must include both creditable foreign
taxes in its U. S. taxable income; if the subsidiary is in a less developed coun-
try, the corporation need not "gross~up" its income to include the creditable por-
tion of foreign profits tax.
United States corporations are not required currently to file consolidated
returns which include the unrepatriated earnings of controlled foreign
subsidiaries.
Domestic corporations deriving the bulk of their income in U. S. possessions
may, under certain conditions, exclude such income from tax.
TABLE 2.-INTERNATIONAL AFFAIRS AND FINANCE
Tax expenditures, 1968
[In millions of dollars)
Individual taxation:
Exemption for certain income earned abroad by U.S. citizens 40
Exclusion of income earned in U.S. possessions 10
Corporate taxation:
Western Hemisphere trade corporations 50
Exclusion of gross-up on dividends of less developed country corporations 50
Exclusion of controlled foreign subsidiaries 150
Exclusion of income earned in U.S. possessions 70
Total tax expenditures 370
Budget outlays plus tax expenditures
[In billions of dollars]
1968
1969
1970
Budget outlays:
Expenditures
Net lending
Total
3.7
.9
3.6
. 3
3. 5
.2
4.6
3.9
3.9
Tax expenditures
Total budget outlays plus tax expenditures
Tax expenditures as percent of budget outlays
.4
.4
.5
5. 0
4. 3
4.2
9
10
14
Agriculture and Agricultural Resources
Farmers, including corporations, may deduct certain costs as current expenses
even though these costs represent inventories on hand at the end of the year or
capital improvements.
Capital gains treatment also extends to the sale of livestock, orchards, vine-
yards, and comparable agricultural activities.
The gain on the cutting of timber is taxed at the rates applicable to long-term
capital gains, rather than at ordinary income rate.
TABLE 3.-AGRICULTURE AND AGRICULTURAL RESOURCES
Tax expenditures, 1968
[In millions of dollars)
Farming: Expensing and capital gains treatment 800
Timber: Capital gains treatment for certain income 130
Total tax expenditures 930
PAGENO="0040"
36
Budget outlays plus tax expenditures
[In billions of dollarsi
1968 1969 1970
Budget outlays:
Expenditures 4.8 5.3 5.1
Net lending 1. 1 . 1 .
Total - 5.4 5.2
Tax expenditures .9 1.0 1.0
Total budget outlays plus tax expenditures 6. 8 6. 4 6.2
Tax expenditures as percent of budget outlays 15 19 19
Natural Resources
Certain capital costs necessary to bring a mineral deposit into production may
be deducted as current expenses rather than spread over the useful life of the
property. Included in this category are the intangible drilling costs of oil and
gas wells and the cost of developing other mineral deposits, such as mine shafts,
tunnels, and stripping.
Extractive industries may choose between two methods of recovering capital
costs invested in the development of natural resources. Under one method, actual
outlays to the extent not immediately expensible may be deducted as "cost
depletion" over the productive life of the property, much as other businesses
may take deductions for the depreciation of capital goods. Alternatively, busi-
nesses in the extractive industries may deduct a prescribed percentage of gross
income (at rates ranging from 27.5 percent for oil and gas to 5 percent for
certain minerals, but not more than 50 percent of net income) where such "per-
centage depletion" exceeds "cost depletion." Percentage depletion is not limited
to the cost of the investment as is cost depletion. The basis for "cost depletion"
is reduced to the extent certain costs are recovered through expensing of ex-
ploration and discovery costs and intangible drilling costs. There is no com-
parable reduction in "percentage depletion" to allow for costs which are allowed
as expenses.
Royalties from coal or iron ore deposits are treated as capital gains.
TABLE 4.-NATURAL RESOURCES
Tax Expenditures, 1968
[In millions of dollarsi
Expensing of exploration and development costs 0300
Excess of percentage over cost depletion 11,300
Capital gains treatment of royo~lties on coal and iron ore 5
Total 1.605
Budget Outlays Plus Tax Expenditures
[In billions of dollars[
-
1968
1969
1970
Budget outlays:
Expenditures
Net lending
Total
Tax expenditures
Total budget outlays plus tax expenditures
Tax expenditures as percent of budget outlays
1. 7
(2)
1. ~
(2)
1. ~
(2)
1.7
1.6
1.9
1.7
1.9
1.7
3. 3
3. 6
3. 6
94
90
90
1 In the absence of the expensing of exploration and development costs and percentage depletion, the 1st year revenue
effect would be $750,000,000 and $1,500,000,000 respectively, The difference from the estimates shown which are based
on longrun effect is due to the fact that taxpayers with mineral properties would initially have little or no tax basis because
of deductions in prior years.
2 Less than $50,000,000.
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Commerce and Transportaflon
Investment credit.-Most businesses may take a tax credit equal to 7 per-
cent of the cost of investments in new machinery and equipment made during
the year. This credit does not lower the basis of the property for calculating
the deduction for depreciation.
Ea~cess depreciation on buildings.-To the extent that allowable depreciation
for tax purposes exceeds the rate at which assets actually depreciate, business
tax liabilities are deferred. Businesses may employ a variety of depreciation
schedules for tax purposes, some of which cause a much larger part of asset
values to be written off in early years of the asset's useful life than do others.
The revenue cost of allowing for buildings depreciation methods for tax pur-
poses that reduce asset value more rapidly than straight-line depreciation (the
method typically used in financial statements) is shown below. The part based
on rental housing is listed under community development and housing. The tax
depreciation allowed for machinery and equipment is closer to actual deprecia-
tion than that allowed on buildings. In addition, the code permits full recapture
as ordinary income of profits. resulting from excess depreciation on machinery
and equipment, but recapture of only a declining and then disappearing propor-
tion of suchprofits on buildings. In view of this and the difficulty of estimating
the divergence, if any, between depreciation allowed for tax purposes and actual
depreciation, depreciation for machinery and equipment is not included here as
a tax expenditure.
Dividend ceclusion.-Individual income taxpayers may exclude $100 of divi-
dends from income subject to tax.
Capital gains-Corporation income ta~v.--Capita1 gains of corporations are
subject to a tax of 25 percent while the rate applicable to other corporate income
above $25,000 is 48 percent (excluding the temporary surcharge).
Bad debt reserves of banks and other financial institntions-Commercial banks,
mutual savings banks, building and loan associations, and cooperative banks are
permitted to set aside bad debt reserves based on stipulated fractions of deposits,
of loans outstanding, or of taxable income before computation for bad debts. The
amounts set aside typically, greatly exceed actual loss experience and reasonable
expectations as to future losses.
Credit unions.-Oredit unions are exempt from Federal income tax.
Deduction of interest on consumer crcdit~-Interest paid on consumer credit is
allowed as an itemized nonbusiness deduction fOr individuals.
E~vpensing of resea'rch and development evpcnditures.-Expeditures by busi-
nesses for research and development (R&D) are carried out to find new products
or processes, to reduce costs, or for other purposes. In nearly all cases, benefits
from such expenditures will accrue for well over 1 year. For tax purposes busi-
ness may deduct all R&D expenditures in the year during which they are in-
curred, or they may amortize them over not less than 5 years.
~Surtacz, e~remption ($25,000) .-Corporations pay income tax at the rate of 22
percent on all taxable income plus a surtax of 26 percent on taxable income in
excess of $25,000 (excluding the temporary surcharge). Each corporation there-
fore enjoys a surtax exemption of $25,000. This exemption is intended to en-
courage small or new businesses.
Deferral of tao~ on shipping companies.-Certain companies which operate U.S.
flag vessel on foreign trade routes receive an indefinite deferral of income taxes
on that portion of their net income which is used for shipping purposes, primarily
construction, modernization, and major repairs of ships.
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TABLE 5-COMMERCE AND TRANSPORTATION
Tax Expenditures, 1968
tin millions of dollarsj
Investment credit 2,300
Excess depreciation on buildings 500
Dividend exclusion 225
Capital gains: Corporations (other than agricultural and natural resources) 500
Excess bad debt reserves of financial institutions 600
Exemption of credit unions 40
Deductibility of interest on consumer credit 1, 300
Expensing of research and development expenditures 500
$25,000 surtax exemption 1,800
Deferral of tax on shipping companies 10
Total 17,775
Budget Outlays Plus Tax Expenditures
tin billions of dollarsj
1968
1969
1970
Budget outlays:
Expenditures
Net lending
Total
Tax expenditures
Total budget outlays plus tax expenditures
Tax expenditures as percent of budget outlays
7. 8
.2
8. 1
(2)
8. 9
. 1
8.0
7. 8
8.1
9. 2
9.0
9. 7
15. 8
17. 3
18. 7
98
114
108
I The revenue cost for 1968 under this category differs from that in exhibit 29 of the Secretary's annual report due to
the exclusion of capital gains-individual and its presentation as a separate item in this revised analysis.
2 Less than $50,000,000.
Coninvunity D evelopnoen.t and Housing
Owner-occupants of homes may deduct mortgage interest and property taxes
(but not maintenance outlays or depreciation) as itemized nonbusiness deduc-
*tions. The owners of rental housing may claim in early years depreciation in
excess of straight-line depreciation. (See Table 5.)
TABLE 6.-COMMUNITY DEVELOPMENT AND HOUSING
Tax Expenditures, 1968
[In millions of dollarsj
Owner-occupied homes, deductibility of:
Interest on mortgages 1,900
Propertytaxes 1,800
Rental housing, excess depreciation 250
Total 3,950
Budget Outlays Plus Tax Expenditures
[In billions of dollarsj
1968
1969
1970
Budget outlays:
Expenditures
Netlending
Total
1.0
3.1
1.3
1.0
2.6
.2
4.1
2.3
4.7
2.8
5.2
Tax expenditures
Total budget outlays plus tax expenditures
Tax expenditures as percent of budget outlays
4.0
8. 1
7. 0
8. 0
98
204
186
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Health and Welfare
A large variety of direct expenditures and transfer payments contribute to
health and welfare of families and individuals, both currently and in later years.
A considerable number of special tax provisions serve related ends.
Provisions relating to the aged, blind, and disabled.-Individual taxpayers age
65 and over may claim two personal exemptions of $600 and a second $100
minimum standard deduction (while persons under age 65 may claim only one
of each). The revenue cost of these additional items is $500 million.
Aged recipients of old age, survivors, and health benefits under the OASDHI
program and of railroad retirement `benefits are not required to include such
benefits in computing tax liability. This revenue cost is $525 million.1
Individual's over age 65 may claim a tax credit of up to $228.60 (15 percent
of $1,524) for a single person or~ $342.90 (15 percent of $2,286) for a married
couple based on retirement income from all sources except social security, rail-
road retirement, or other tax-exempt benefits. In effect, the provision permits
taxpayers with taxable retirement income a tax benefit approximately comparable
to that accorded recipients of social security and similar tax-exempt benefit
payments. The revenue cost is $200 million.
The combined revenue cost of these three provisions is $2.3 billion. Because `of
the effect of the interrelationship of the three provisions on the tax base, the
combined cost exceeds the sum of the three provisions taken separately, since
the absence of one provision would increase the residual significance of the others.
The blind qualify for two $600 personal exemptions `and an extra $100 minimum
standard deduction.
"Sick pay" ea,clusions.-Oertain payments financed by an employer in lieu of
wages during periods of employee injury or sickness are excluded from the
employee's income.
Ecoclusion of unemployment insurance beneflts.-Benefits paid by State unem-
ployment insurance plans are financed by a tax on wages paid `by the employer
and deductible by him, but these benefits are excluded from the employee's
income.
Ecoclusion of workmen's compensatio~n beneflts.-Benefits paid under work-
men's compensation are excluded from employee's income. These payments are
primarily intended to replace earnings lost due to a work~related injury or
illness, although some small part of the total payments is compensation for
physical loss, such as an eye or `an arm. As in the case of' unemployment insur-
ance, the benefits are financed by the employer's contributions and are deductible
by him.
Ecvclnsion of public assistance.-Public assistance payments are excluded from
taxable income.
Ecoclusion for employee pensions.-Employer contributions to qualified eni-
ployee pension and annuity plans are deductible `by the employer. Income earned
by these plans on their investments is not taxable. When an employee retires
and is paid a pension or annuity, only part of the amount received is taxable to
the employee. He does not pay taxes on the percentage of the benefit purchased
by his contributions excluding from the percentage income earned on his
contributions.
The revenue cost of the exclusion of investment income earned by all private
pension funds, based on the corporate tax rate is $1.9 billion. The revenue cost
of deduction of the total amount contributed by employers to these qualified
plans, based on the corporate tax rate, is $3.4 billiOn.
The revenue cost, `based on the individual income tax rates applicable to em-
ployees, is $0.7 billion as respects t'he investment income and $1.4 billion as
respects the employers' contributions.
The greater the extent to which the benefits are vested, the more relevant is
the use of the individual t~x ratuiii4 estbnating the revenue cost. Taking this
vesting into account, the revenue cost of the treatment of pension plans can be
put at $3 billion.
1 This revenue estimate is based on treatment comparable to other pensions and regards
one quarter of the benefits as approximately the cost of employee contribution.
PAGENO="0044"
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Deduction for self-employed retirenwmt.-Self-employed individuals are per-
mitted a deduction from taxable income for funds they set aside currently in
qualified retirement plans.
Eaclusion of other employee benefits.-In addition to the benefits already
enumerated, a number of other employee benefits (shown in Table 7), the cost
of which is paid at least in part by the employer, are also excluded from income
subject to tax. The cost to the employer is deductible, and the benefit to the
employee not taxable, in all of these cases.
* Eccelusion of interest oii life insurance savings.-Life insurance policies other
than term policies, generally have a savings element in them. Savings in the
form of policyholders' reserves are accumulated from the premium payment,
and interest is earned on these policyholders' reserves. Such interest income is
neither taxable as it accrues nor as an element of death benefits.
Deductibility of contributions for other than education-Contributions to
charitable, religious, or certain other nonprofit organizations are allowed as an
itemized deduction for individuals generally up to 30 percent of adjusted gross
income. Unlimited contributions, however, may be deducted by those taxpayers
(a relatively small number) whose contributions plus income taxes equal 90
percent of taxable income in S out of the preceding 10 years.
Taxpayers whose contributions to charitable or educational organizations are
in the form of capital assets, usually securities, which have appreciated in value
above their cost, obtain a deduction for the contribution at the appreciated
value of the asset without taxation on the appreciation in value.
Ded~wtibility of medical e~vpenses.-Medical expenses in excess of 3 percent
of adjusted gross income and expenditures for prescribed drugs and medicines
in excess of 1 percent of adjusted gross income may be deducted by individuals
as itemized nonbusiness deductions. Individuals may also deduct half of the
premiums paid for medical care insurance up to a maximum deduction of $150
per year, without regard to the 3 percent limitation.
Deductibility of child and dependent care e~pcnses.-Deductions for.a limited
amount of expenditures for the care of children under 13 or incapacitated
dependents to enable the taxpayer to work are permitted under certain
circumstances.
Deductibility of casualty losses-Taxpayers may deduct as an itemized non-
business deduction the amount in excess of $100 for each loss due to fire, theft,
or other casualty to the extent not compensated by insurance.
Standard deduction.-Individuals may itemize deductions for certain personal
nonbusiness expenditures, including charitable contributions, interest payments,
and medical and drug expenses above a stated percent of income, and certain
other items referred to earlier. The taxpayer is also given the option of deduct-
ing-instead of this itemization-standard deduction of 10 percent of adjusted
gross income or $1,000 ($500 if married and filing separately), whichever is less.
PAGENO="0045"
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TABLE 7.-HEALTH AND WELFARE
Tax Expenditures, 1968
[In millions of dollarsj
Aged, blind, and disabled:
Additional exemption, retirement income credit and exclusion of OASDH1 for aged 2,300
Additional exemption for blind 10
Exclusion for sick pay 85
Exclusion of unemployment insurance benefits 300
Exclusion of unemployment insurance benefits 300
Exclusion of workmen's compensation benefits 150
Exclusion of public assistance benefits 50
Exclusion for employee pensions 3, 000
Deduction for self-employed retirement 60
Exclusion of other employee benefits:
Premiums on group term life insurance 400
Accident and death benefits 25
Medical insurance premiums and medical care 1, 100
Privately financed supplementary unemployment benefits 25
Meals and lodging 150
Exclusion of interest on life insurance savings 900
Deductibility by individuals of charitable contributions (other than education) including untaxed appreciation_.... 2,200
Deductibility of medical expenses 1, 500
Deductibility of child and dependent care expenses 25
Deductibility of casualty losses 70
Standard deduction 13,200
Total 15,550
Budget Outlays Plus Tax Expenditures
[In billions of dollarsj
1968
1969
1970
Budget outlays:
Expenditures
Net lending
Total
Tax expenditures
Total budget outlays plus tax. expenditures
Tax expenditures as percent of budget outlays
43,4
. 1
49 5
-. 6
55 0
(2)
43.5
15.6
48.9
18.0
55.0
19.5
59. 1
66. 9
74.5
36
37
36
1In the absencetof the 10 percent standard deduction and most itemized nonbusiness deductions, the minimum standard
deduction as presently structured would be taken by all taxpayers and its revenue cost would be relatively large. Under
present treatment, the minimum standard deduction, in keeping with its objectives, isclaimed almost entirely by low-
income taxpayers and its revenue cost is $300,000,000. The revenue estimate assumes the minimum standard deduction
is designed to assist only low-income taxpayers. The minimum standard deduction is regarded in this analysis as related
to the system of personal exemptions and thus a part of the structure of an income tax system based on ability to pay,
rather than as a tax expenditure.
2 Less than $50,000,000.
Education and Manpower
Additional personal eccemption for students.-Taxpayers may claim personal
exemptions for dependent children over 18 who receive $600 or more of income per
year only if they are full-time students. The student may also claim an exemption
on his own tax return, in effect providing a double exemption, one on the parents'
tax return and one on the student's.
Deductibility of contributions to educational institutions.-~Oontributions to
nonprofit educational institutions are allowed as an itemized nonbusiness deduc-
tion for individuals.
Eccclusion of scholarsli~ips and fellowships.-Recipients of scholarships and
fellowships may exclude such amounts from taxable income, subject to certain
limitations.
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TABLE 8.-EDUCATION AND MANPOWER
Tax expenditures
[In millions of dollars)
Additional personal exemption for students 500
Deductibility of contributions by inciividuals to educational institutions 170
Exclusion of scholarships and fellowships 50
Total 720
Budget outlays plus tax expenditures
[In billions of dollars)
1968 1969 1970
Budget outlays:
Expenditures 6.6 6.9 7.6
Net lending .
Total 7.0 7.2 7.9
Taxexpenditures .7 .8
Total budget outlays plus tax expenditures 7. 7 8. 0 8. 8
Tax expenditures as percent of budget outlays 10 11 11
Veterans Benefits and Services
All veterans pensions due to disability and those paid by the Veterans Admin-
istration due to age (over65) are excluded from taxable income.
TABLE 9.-VETERANS BENEFITS AND SERVICES
Tax expenditures, 1968
[In millions of dollars)
Exclusion of certain benefits 550
Budget outlays plus tax expenditures
[In billions of dollars)
1968
1969
1970
B~idget outlays:
Expenditures
Net lending
Total
Tax expenditures
Total budget outlays plus tax expenditures
Tax expenditures as percent of budget outlays
6. 7
. I
7. 4
. 3
(1)
7. 8
6.8
.6
7.7
.6
7.8
.7
7. 4
8. 3
8. 5
9
8
9
1 Less than $50,000,000.
Aid to State and Local Government Financing
The Federal Government through certain tax provisions provides indirect
assistance to State and local governments. The deductibility of property taxes
on owner-occupied homes involving a revenue cost of $1.8 billion is listed above
under community development and housing as an element of the tax system
which provides support to promote housing. This deduction also aids States and,
particularly, local governments, by providing more flexibility in financing their
expenditure programs.
Two other special tax provisions also aid State and local governments, but
unlike the deductibility of property taxes on homes, they do not fit clearly within
any of the functional categories now used in the budget. They are, therefore,
shown as a separate budgetary heading, aid to State and local government
financing.
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43
In calculating income subject to tax, individuals may take as iten~ized non-
business deductions State and local personal income, gasoline, sales, property,
and other taxes. The deductibility of all these State and local taxes (with the
exception of taxes on owner-occupied homes) on nonbusiness returns is classified
as support for the finances of State and local governments, rather than listed
under any of the functional categories in the current budget.
As a result of the exclusion from tax of State and local bond interest, these
governments are able to sell debt obligations at a lower interest cost than would
be possible if such interest were subject to tax.
The relative importance of indirect assistance to State and local governments
through these provisions as compared with direct aid is not shown because the
present budget does not show in a single functional category the aid given to State
and local governments. The amounts of direct Federal aid by function, however,
are brought together in ~Special Analysis 0 of the Budget for fiscal year 1970.
TABLE 10.-AID TO STATE AND LOCAL GOVERNMENT FINANCING
Tax expenditures, 1968
[In millions of dollarsj
Exemption of interest on State and local debt obligations 1,800
Deductibility of nonbusiness State and local taxes (other than on owner-occupied homes): 1
Individual income tax 1,350
General sales taxes 775
Gasoline taxes 400
Personal property taxes 150
Other taxes 125
Total 2,800
Property taxes on owner-occupied homes (included under community development and housing) 1,800
Total, all State and local nonbusiness taxes 4,600
1 For businesses owned by individuals, taxes other than income taxes are considered a cost of doing business and thus
deductible in arriving at a net income figure.
Capital Gaina-Individnal Income Taco
The tax treatment of capital gains of individuals involves a large amount of
tax expenditures. These expenditures would fall under a variety of functions
in the Federal budget, including commerce and transportation, agriculture and
agricultural resources, natural resources, community development and housing,
and health and welfare. Available sources, however, do not provide a basis for
accurate distribution among these functions. Thus, to avoid distorting any single
category but to identify the importance of this special provision under the indi-
vidual income tax, a new heading outside the budget classification is included
for this item. Omission of this item leads to an understatement of the amounts
of tax expenditures for the functional categories affected.
The types of special treatment accorded capital gains and the resulting tax
expenditures are as follows:
If the owner of appreciated capital assets dies, the capital gains tax is not
applied to appreciation which would have been taxable had he sold the assets
just before death. Heirs who receive appreciated property from the decedent
and who subsequently sell the property are subject to capital gains tax only on
appreciation occurring after they acquired the property. Thus the appreciation
on assets held until death is never taxed under the income tax. The revenue cost
of this treatment is $2.5 billion at present capital gains rates. (If taxed at full
ordinary rates, the cost is $4 billion.)
As to realized gains, half of the gains from the sale of capital assets held
more than 6 months is excluded from income, and in no case is the tax rate
applicable to such capital gains allowed to exceed 25 percent. The revenue cost
of this treatment is $4.5 billion. The revenue cost of this treatment sit ordinary
rates for both realized gains and gains untaxed at death is $8.5 billion (includ-
ing the $4 billion mentioned above).
The cost of capital gains treatment under present law is complex for a number
of reason. It could be contended that:
1. Full taxation of realized capital gains, even with full taxation at death,
could result in greater postponement of lifetime gains;
PAGENO="0048"
44
2. With a different treatment of capital gains another approach to the
corporation tax might provide for some integration of corporate and md-
vidual taxes by giving taxpayers who sell corporate shares some credit for
taxes paid by the corporation on retained income which is reflected in share
values; and -
3. Averaging of capital gains would lower the indicated revenue costs.
In recognition of the complex issues involved, the tax expenditures involved
in the present treatment of capital gains of individuals are placed in a range
of $5.5 to 8.5 billion. (No table is shown for this heading.)
IMPORTANCE OF TAX EXPENDITURES
The above analysis indicates that tax provisions control a large fraction of
budget resources employed in several functional categories. With respect to
commerce and transportation, for example, the volume of budget resources al-
located by current special tax provisions is approximately the equivalent of
budget outlays. In certain other functional categories, such as natural resources,
community development and housing, and health and welfare, tax provisions
constitute a major component of total Government activities.
Many reasons for the enactment of these tax provisions may be found other
than the promotion of the functional activity under which they are listed, just
as a multitude of forces affect the approval of direct Government expenditures
which are nonetheless summarized under specific functional headings. This
analysis in no way reflects on the wisdom of such reasons.
More efficient use of resources by the Federal Government is advanced, how-
ever, if explicit account is taken of all calls upon budget resources, including tax
expenditures. The relative importance of different budgetary objectives can be
more carefully weighed against all the budget resources used for `this objective.
Also, the effectiveness of alternative methods of achieving these objectives,
whether through direct outlays, loan subsidies, or tax expenditures, can be fully
understood, examined, and reevaluated periodically.
Secretary BARR. That concludes my testimony, Mr. Chairman, and
I thank you.
Chairman PATMAN. Thank you very much, Mr. Secretary.
(Secretary Barr's prepared statement follows):
PREPARED STATEMENT OF SECRETARY OF THE TREASURY JOSEPH
W. BARR
Mr. Chairman and Members of the Joint Economic Committee, I appreciate the
opportunity to meet with this distinguished Committee. I think it extremely
important that the members have the economic rationale for the financial plan
President Johnson has recommended to the Congress-a plan that is responsible
and realistic in terms of the country's needs and resources, and that is consistent
with our responsibilities to keep the dollar strong and respected.
Before getting into the body of my remarks, I want to take a moment to pay
tribute to you, Mr. Chairman, to the Vice Chairman, Mr. Patman, and to the
members of the Committee. Under your leadership, the work of this Committee
has contributed greatly to the tremendous growth of public interest in economic
issues, to better informed public attitudes on economic policy, and to the record
economic progress the United States has achieved.
The economy is now in the 95th month of the most sustained and vigorous
period of economic expansion in our country's entire history. There is no need
for me to enumerate here the many economic records established during this
period of unprecedented prosperity. I believe that in his State of the Union
Message and in his Economic Report to the Congress the President clearly
established that the economy is now stronger. and more vigorous than ever
before, with production, employment, and after-tax income, including both wages
and profits', all at record highs, far above the levels of a decade ago.
PAGENO="0049"
45
And I want to emphasize that this isn't just a dollar prosperity. The purchasing
power of the a~erage American-~the real goods he can buy with his dollar
income after taxes-has actually increased by 31 percent between 1960 and
1968. This, gentlemen, is the basic definition of economic progress.
Perhaps an even more significant aspect of our economic well-being is that it
is probably being shared by a broader segment of our population than during
any previous time of great prosperity. Not only have business profits soared to
record highs but the unemployment rate has been sharply reduced-particularly
among minority groups who have not adequately shared in economic gains of
the past. Much remains to be done in this key area of national policy, but it
is clear that significant progress has been made in removing barriers and expand-
ing job opportunities for our under-privileged citizens.
However, we must recognize that serious economic problems must still be
overcome. The increase in consumer prices in the past year of nearly 4 percent is
certainly larger than we can tolerate for very long. Although a small balance
of payments surplus was achieved in 1968, vigorous efforts must continue to
maintain this record in the current year.
Today I want to go beyond the over-all indicators of a prosperous economy
and in a sense see whether the financial underpinning of our economy will
support continued sound expansion in the years to come. I also want to review
briefly a few items of major, unfinished business that will bear heavily on our
future economic growth and, in some instances, that of the entire Free World.
Probably the most important single component of this financial underpinning
of our economy is the Federal budget. A properly designed budget should reflect
what the country needs, what it can afford and what the Congress can be expected
to do. In my judgment President Johnson has presented to the Congress a
budget that fully meets this standard. In fiscal 1969 the budget is expected to be
strongly in the black, with outlays of $183.7 billion, revenues of $186.1 billion
and a surplus of $2.4 billion. For fiscal 1970 we have projected an even larger
surplus of $3.4 billion.
In fiscal 1970 budget receipts are estimated at $198.7 billion, an increase
of $12.6 billion over the estimate for fiscal 1969. Outlays in fiscal 1970 are pro-
jected at $195.3 billion. The estimated increase in fiscal 1970 Federal revenue
is due almost entirely to anticipated economic growth. For calender 1969 we
have projected a gross national product of $921 billion, personal income of
$736 billion and corporate profits of $96 billion.
Now there is nothing inherently good or bad in itself about a budget surplus
or deficit. The test is whether it contributes to the economic strength of our
country. And a budget does this only when it is consistent with current and
prospective economic realities.
In the context of the economy as we see it, a Federal budget surplus for fiscal
years 1969 and 1970 is necessary for several important reasons.
First, a budget surplus will tend to restrain over-all demand during a
time when our productive capacity is straining hard to meet the demands thrust
upon it. Second, a budget surplus means that during this period the Treasury
will not on balance be competing for funds in our already hard-pressed credit
markets. In fact, in fiscal 1969 and 1970 taken as a whole, the Treasury will
actually be adding funds to the private credit markets in contrast to the
situation in 1969 when $23.1 billion had to be drawn from private investors.
This healthy situation means greater freedom for the Federal Reserve to estab-
lish effective monetary policies, and more ready access to private savings by
private users of credit and state and local governments-borrowers who have
had a rough time in past tight money periods. In this context the home-building
industry in particular should greatly benefit.
A third important reason for maintaining a Federal budget surplus at this
time is that it will strengthen the hand of our negotiators during the critical
period in which we will be working to improve and modernize the international
monetary structure.
The Federal Government influences economic activity and the distribution of
income not only through direct expenditures and loan programs but also through
special tax provisions. A dollar foregone through a special tax provision is no
different than a dollar spent through a budget outlay. In other words, these
24-833 0-69-pt. 1-4
PAGENO="0050"
46
tax expenditures use budget resources in the same way that direct expenditures
or net lending do. In most eases, the special tax provisions are alternatives to
direct expenditures or net lending to achieve the same purpose.
The Annual report of the Secretary of the Treasury for fiscal year 1968.
which was issued this week, contains for the first time a detailed description and
discussion of these tax expenditures and estimates of the amounts involved. To
bring this material up to date, the Treasury staff has prepared an analysis of
tax expenditures related to the budget for fiscal year 1970 which I am submitting
as a supplement to my statement. The revenue costs of the special tax provisions
are presented alongside the budget outlays. This makes it possible to get a
more complete picture of total government expenditures for various functions.
You may be surprised to find that tax expenditures approach or even surpass
the budget outlay for certain functions.
The purpose of this special analysis is to present information which will help
us to use budget resources most effectively. We can obtain more efficient use of
resources by the Federal Government if explicit account is taken of all calls
upon budget resources. In this way the importance of different budgetary objec-
tives and the effectiveness of alternative uses, whether through direct expendi-
tures, loan subsidies, or tax expenditures, may be fully understood, examined,
and re-evaluated periodically.
I should inject a note of warning at this point. As the Committee knows, the
whole subject of tax expenditures is highly controversial and the figures pre-
sented in this Treasury report are themselves certain to be controversial. The
figures may vary depending on the assumptions used, and we do not claim that
our figures and assumptions are the last word. Perhaps the Committee might
want to have its staff analyze this document-perhaps in conjunction with
the staffs of the Joint Committee on Internal Revenue Taxation and the Appro-
priations Committees. The staff of the Treasury will be pleased to cooperate.
Many of the provisions in the Tax Code are virtually the same as appropriations
and should be considered by the Congress as they review the various Federal
programs.
Let me turn now to four areas where I believe there is urgent need for action
by the United States. or by those nations whose economic future is closely linked
with our own.
THE NEED FOR TAX REFORM
We have an income tax system which has demonstrated its strength-$128.3
billion of revenues expected in fiscal year 1970-and its flexibility. The income tax
is one of our country's strongest assets, and we must strive to improve it and
perfect it.
Our income tax system needs major reforms now, as a matter of importance
and urgency. That system essentially depends on an accurate self-assessment by
taxpayers. This, in turn, depends on widespread confidence that the tax laws and
the tax administration are equitable, and that everyone is paying according to
his ability to pay.
We face now the possibility of a taxpayer revolt if we do not soon make major
reforms in our income taxes. The revolt will come not from the poor but from
the tens of millions of middle-class families and individuals with incomes of
$7,000 to $20,000, whose tax payments now generally are based on the full
ordinary rates and who pay over half of our individual income taxes.
The middle classes are likely to revolt against income taxes not because
of the level or amount of the taxes they must pay but because certain pro-
visions of the tax laws unfairly lighten the burdens of others who can afford
to pay. People are concerned and indeed angered about the high-income re-
cipients who pay little or no Federal income taxes. For example, the extreme
cases are 155 tax returns in 1967 with adjusted gross incomes above $200,000
on which no Federal income taxes were paid, including 21 with incomes above
$1,000,000.
PAGENO="0051"
47
Judging from taxpayers' letters to the Treasury, I would say that many
people are upset and impatient over the need for correcting these and other
situations which demand our attention. In this connection, I should point out
that the 10 percent surcharge has made many taxpayers more aware of the in-
equities in our present tax system and more demanding that reforms be adopted.
I believe public confidence in our income tax system is threatened and that
tax reform should be a top priority subject for the new Administration and the
91st Congress.
As you know, we at Treasury have been working on tax reform proposals
for more than two years, and they are now ready. They will be turned over to
Secretary-Designate Kennedy and, upon request, to the Congress.
I feel that the enactment of major reforms to substantially improve the fair-
ness, simplicity, and neutrality of our income taxes are essential to continue
and strengthen public confidence in our tax system.
THE NEED FOR RESTORING THE UNITED STATES TRADE POSITION
The international trade position of the United States is rapidly deteriorating.
It is essential therefore that we make a forceful policy response to restore our
trade account to a position of strength. Short of this, we will find a continuing
upsurge apparent in the country.
The answer to our trade problem does not lie in an overhauling of our tax
system through the introduction of a value-added tax either in addition to or in
lieu of our present taxes. The adverse domestic effects of such a move would
far outweigh any small trade advantage which we might gain.
What we might well consider instead is our own system of border adjust-
ments, encompassing both a tax on imports and a payment to exporters. The
level of these adjustments would be unrelated to our domestic tax system. The
rates would be set at whatever level is necessary to achieve our objective-a
healthy trade surplus. This system should be established under the strict control
of the General Agreement on Tariffs and Trade or other appropriate interna-
tional body.
THE NEED FOR ACTION ON TIlE SDR FACILITY
I would urge the member nations of the International Monetary Fund that
have not yet completed action on the Special Drawing Rights Facility to do so
promptly. Their ratification of the Proposed Amendment to the IMF Articles
of Agreement establishing the SDR Facility will bring closer the day when the
world will be assured of an adequate growth in monetary reserves.
The SDR Facility will be created when 67 member nations having 80 percent
of the weighted votes in the Fund have ratified the Amendment, and when mem-
bers having at least 75 percent of the quotas in the Fund have deposited with it
an instrument of participation.
The United States completed action on the SDR Facility last July 15. However,
as of January 10 of this year, only 29 members of the Fund having 471/2 percent
of the total votes had ratified the Proposed Amendment.
After years of intensive negotiations, nations have neared establishment of
a method for creating the monetary reserves needed by a rapidly growing world
economy. We are near the goal of the most important reform in the international
monetary system since the Bretton Woods Agreement of 1944. I earnestly hope
that other nations and their governments will make it possible for the world
to reach that goal within a period of weeks or months.
PAGENO="0052"
48
THE NEED FOR SUPPORT TO MULTILATERAL DEVELOPMENT INSTITUTION
I am also deeply concerned about two items of unfinished business in the
field of multilateral development finance. Both-the replenishment of the In-
ternational Development Association and the provision of special funds for
the Asian Bank-involve institutions that I have been intimately involved with
over the years. What we in the United States do in regard to these two institu-
tions can have a profound effect on the well-being and the very lives of millions
among the two~thirds of the world's population that has little to possess and
still less to hope for.
As a freshman Congressman, I helped write the legislation for our participa-
tion in IDA. I have seen it in action in the field, in Asia in 1963 and in Africa
in 1967. I know it is capably guided by the World Bank under Robert MaNa-
mara's sure hand.
IDA is, most importantly, serving in a growing way the primary function we
had in mind in the late 1950's-it is mobilizing a greater share of development
resources from the other advanced countries. It is putting these resources to
work in an efficient and effective manner. Eighteen other countries put up a
total substantially greater than our own. Our share in the effort has been re-
duced from 43 percent at the outset to 40 percent currently, meaning a cumula-
tive transfer of the burden of about $150 million.
The contribution proposed for the United States-$160 million in each of
three years-will have no adverse effect on the U.S. balance of payments, be-
cause we have obtained internationally agreed safegards to ensure this.
But the entire IDA replenishment package cannot become effective unless
the U.S. makes its contribution. I consider it of the highest urgency for the Con-
gress to demonstrate again its consistent attitude of bipartisanship toward IDA
by acting on the legislation that has been re-introduced in recent days.
While IDA's operations are world wide, those of the Asian Bank are con-
centrated in the area of the world that has been torn by intense conflict and
wracked by human misery for all too many years. In December 1965, I was
privileged, along with Eugene Black, to sign the agreement establishing the
Asian Development Bank, thus placing us firmly on the path of constructive
multilateral development in Asia. Many members of the Congress and Con-
gressional staff members participated actively in the events leading up to the
creation of the Asian Bank. It is now in being, with a distinguished staff and
with an effective loan and technical assistance program moving forward.
However, the Bank needs additional resources-beyond its regular funds for
conventional lending-for special lending programs on favorable terms in fields
such as agriculture and transportation. The new budget proposes a $25 million
U.S. contribution to Asian Bank special funds in 1969 and 1970, and I consider
this action, already long delayed, as crucial to Asia and our total interests there.
These funds will help to encourage regional cooperation and peaceful devel-
opment in southeast Asia. Like our IDA contribution, we would be putting up
only a monority share; Japan and other advanced countries will bear the major
burden. And this contribution, too, will have no adverse balance of payments
effect since it will finance U.S. goods and services.
I sincerely hope that both these vital programs will promptly receive the
Congressional support they deserve.
I am submitting with my statement for the record a set of charts
with the heading "The Fiscal Program for 19~'O in Perspective."
These charts set forth the economic rationale for the financial plan
which President Johnson recommends to the 91st Congress, and I
would like at this time to review them with you.
(The material referred to follows:)
PAGENO="0053"
~]E1
ff~i ~ ~
Office of the S cretary of the Treasury
PAGENO="0054"
THE ~ESCAL PROGRAM FOR 1970 IN PERSPECTIVE
Current Fiscal Picture
Chart 1 Budget Outlays and Receipts, Fiscal Year 1970
Chart 2 - Effect of Tax Action on Budget Deficit Fiscal Years 1969 and 1970
Chart 3 Original Revenue Estimates Compared with Actuals
Burden of Federal Debt and Expenditures
Chart 1~ - Budget Outlays as a Percent of Gross National Product
Chart 5 - Net Federal Borrowing From or Repayment to the Public
Chart 6 - Federal Debt Held by the Public as a Percent of Gross National Product
Perforn~ance of Econo~y in Recent Years
Chart 7 - GNP Growth and Price Comparisons
Chart 8 - Growth of Civilian Buploynient, 1962-' 68
Chart 9 - Real Gross National Product After the Recession Troughs of l951~ and 1961
Chart 10- Annual Rate of Growth in Selected Countries
Ghart U- Annual Rate of Cost of Living Increase
PAGENO="0055"
Effects of New Tax Program on Taxpayers
Chart 12- Tax Burden in Selected Countries
Chart 13- Tax Savings From Actions Taken After 1963
Chart i~~- Tax Savings at 1969 Proposed Rates Compared with 1963 Rates
Chart 15- Tax Savings as Percent of 1963 Tax: At 1969 Proposed Rates Compared with 1963 Rates
Balance of Pa~ments
Chart 16 - U.S * Balance of Payments on "Liquidity" Basis and Gold Sales
Chart 17 - U.S. Balance of Payments on "Official Settlements" Basis and Gold Sales
Chart 18 - U.S. Reserve Assets and Federal Reserve "Swap" Lines, I~te 1968
Tables
Table 1 - Federal Spending and Receipts, ~IA and Unified Budgets
Table 2 - Unified Budget Receipts and Expenditures, Vietnam and Non-Vietnam
Table 3 - New Budget Concept of Federal Debt and Federal Debt as Percent of GNP
Table ~ - Comparison of Tax Liabilities Under Proposed Surcharge Continuation: Single Individual
Table 5 - Comparison of Tax Liabilities Under Proposed Surcharge Continuation: Married Couple,
Two Dependents
Table 6 - Comparison of Tax Liabilities Under Proposed St~rcharge Continuation: Married Couple,
No Dependents
PAGENO="0056"
Chart 1
The budget in fiscal year 1970 should register a surplus if economic
policy in the country is to be responsible and realistic. The estimate of
$195.3 billion in total budget outlays represents our minimum requirements to
meet the urgent domestic and international needs0 An extension of the
surcharge will make it possible to meet these requirements and to provide
for a surplus which will be helpful in relieving inflationary pressures.
It is clear from the chart that if hopes for an early settlement of the
Vietnam war are realized, military expenditures can be reduced and substantial
savings made for other desirable purposes.
PAGENO="0057"
Chart 1
BUDGET OUTLAYS A~D RECEIPTS, FUSCAL YEAR 1910
Billion Dollars
A surptus is needed to:
--Support Southeast Asia commitments 195.3
--Continue domestic programs g- --
--Retieve inftatiooary pressures
Southeost .`~ Surplus
As/c
Support
All Other...~ r
Defense
Outlays
Note: Fi~iire~ are rounded
I ~ Taxes
L~-~4L' Other
198.7
Trust Funds ~
l'''~'~'~'
Income Tax
~Corporati~'n
Income Tax
`~Emp/oyment Taxes
All Other~'~
Receipts
Ofta of the teentsy of the Tereoury
PAGENO="0058"
Chart 2
Under existing legislation, a budget surplus is expected at
$1.9 billion in fiscal year 1969 reflecting the surcharge, excise and
other provisions enacted last June0 The proposed surcharge extension
would add another $0.5 billion, reflecting estimat~d corporate tax
payments.
Under existing legislation for fiscal year 1970, the budget would
register a deficit of $7.1 billion.
Under proposed legislation, revenue yield would increase $10.5
billion to yield a surplus of $3.4 billion.
NOTE: The $10.5 billion includes the net effect of increased social
security contributions and benefit payments,
PAGENO="0059"
1.0
9.0
$BiI.
Chart 2
E~1ECT tfl~F PEROPtD~E~ TAX ACT~ ~EJJ~ ~~ET
EHISCAL YEARS ~fl~J A~k~ ~J1~
2.0
2.0
$BiI.
2.0
4.0
6.0
8.0
2.0
4.0
FY. 1969 FY. 1970
6.0
8.0
Office of theSecoefocy citheTeaccy
PAGENO="0060"
Chart3
The record shows that this Administration has not overestimated
receipts iii order to justify higher expenditures. Actual receipts have
equaled or exceeded the original estimates in four of the last five years.
(In the chart, the original estimates for the fiscal
years 1968 and 1969 have been adjusted to take account
of legislation which was proposed but not enacted.)
PAGENO="0061"
Chart 3
OROGII~1AL REVE~WE E3T~ATES CO~PA~EE~ W~IT~ ACTQJALS
Administrative Budget 1965-68; Unified Budget 1969
$BiI.
150
Current
estimate
$BiI.
100 -
Original estimates
adjusted for legislation
and regulations
4,
Actuals
150
50 -
0
100
50
1969
0
Office of the Secoetary of the Toeccoty
PAGENO="0062"
Chart 4
Federal outlays as a proportion of gross national product have remained
at about one-fifth for the past fifteen years0 However, excluding special
Viet Nam costs and the self.-financed social insurance trust funds, outlays
have been declining as a share of the Nation' s product - - declining from an.
average of 15.9 percent during 1955-1960 to 14.2 percent in l968~ This share
will decline further to 12.9 percent and 13.2 percent in fiscal years 1969
and 1970, respectively.
PAGENO="0063"
Percent ~3) 1 f~
25 - i~U~J9et `~Juhay3
as a Percent o~ Gross National Product
LJ~&~L Funds
Chart 4
C~11
to
0
1955 1960
Fiscal Years
1965
1970
Estimate
PAGENO="0064"
Chart 5
The budget surpluses in fiscal years 1969 and 1970 will permit sizab]e
repayment of debt to the public. This is in contrast with the huge Federal
borrowing of $23 billion during fiscal year 1968. In the period ahead, the
Federal Government would be providing funds to the private sector and
contributing to easier money and capital markets, instead of exerting
pressure on the supply of credit as it did in fiscal 1968.
PAGENO="0065"
I
1969
1970
-Estimated -~
0
Chart 5
~k!ET FEDERAL BO~OWUk~G FROM OR
REPAY~E~T TO THE PUBLOC
Fiscal Years
~3iL
25
20
15
10
5
$BiI.
25
20
`5
10
5
0
-5
1968
Actual
Repayment
I.
Source: /970 Budget Document
RI
Office of the Secretay of the Toeaeury
PAGENO="0066"
Chart 6
Federal debt held by the public has grown at a much slower rate than the
economy. Federal debt held by the public as a percent of gross national
product has continued to decline in recent years. From the peak of almost
l~ times the GNP in fiscal 1946, the Federal debt held by the public dropped
to 48 percent in 1960 and 40 percent in 1965. The 1970 budget would bring
down this percentage even further to 29 percent0 By this measure, the
size of the Federal debt would represent a steadily lessening burden on the
economy.
PAGENO="0067"
63
H
r)
CD
o~_ C)
~
fl*e~
r.
C,
a
.1
PAGENO="0068"
Chart 7
Between 1960 and 1966, real GNP was strong enough to attain more complete
utilization of the Nation's resources than in former years. At the same time,
prices remained relatively stable. In the last two years, however, strains on
our economic resources have begun to* develop and were reflected in an
acceleration of price advances.
PAGENO="0069"
Chart 7
GNP GROWTH ANb PRICE COMPARISONS
During 1960:66 the economy greatly improved in both growth and price performance:
however, prices accelerated rapidly in 1967 and 1968.
S `60
è~NP P,i~e Deflator.
Annual Rate of Price Change*
1955 I960-
`60 `66
1960-
`66
PAGENO="0070"
Chart 8
Sustained economic growth without recessions from 1960 to 1966 has
generated large employment gains. The average annual increase in civilian
`employment amounted to 700,000 during 1953-60 as compared with 1.2 million
between 1960 and 1966. In the last two years, gains mounted,to 1.5 million
per year.
PAGENO="0071"
Millions
of
Jobs
76
70
65
6o-~
Chort 8;
GROWTH OF GMUA~ E~flPLOY~~T, ~
Economic Grot~ith Means More Jobs; Slack Means Fet~ier Jobs
L~2~!r!css
of
1960-'SI
Roco~fon*. ~4I
Rocotrnion*
- 1953-'54
Rocoo&on *
70
65
P~1il2on3
LO
£-
.7~:
I8D~-~O
0 __________
1952 1 `56 `60 `62 164
*Per,ods of r~ession osdc/edbyNotIoiioIflu,oouofEconorn,~Ras~cjr,)
~160
0
166
PAGENO="0072"
Chart9
The accelerated rate of growth in GNP during 1961-68 has made available
a considerably larger volume of goods and services each year to consumers,
business and government. The chart shows a widening improvement in the more
recent performance as compared with the earlier period. Since the early 1961
cyclical trough, GNP in 1958 prices has increased 49 percent,which compares
with an increase of 29 percent for a comparable' period of time since the 1954
recession trough. ,
PAGENO="0073"
140
Chart 9
REAL GROSS NATIONAL PRODUCT AFTER THE RECESSION TROUGHS OF 1954 and 1961
150
I I I I
0 6 12 18 24 30 36 42 48
Months After Trough
NOTE-BASED ON SEASONALLY ADJUSTED QUARTERLY DATA.
SOURCES: DEPARTMENT OF COMMERCE AND COUNCIL OF ECONOMIC ADVISERS.
PAGENO="0074"
Chart 10
During the late 1950 s, the growth rate of the U. S. economy fell below that of
other maj or i~dus trial countries. In the 1960 `3,~ the U. S. growth rate has risen
appreciably and coi~pares very favorably with growth rates abroad.
PAGENO="0075"
Chart 10
A~UAL RATE OF GROWTH ~ SELECTED COUNTRIES*
In the 1960's U.S. growth compares favorably with that of other countries
*perce,iIcge chonge ii constant dollar GNR
Source. OECO
Office of the Secretary cf the Srceury
PAGENO="0076"
Chart ii
The U. S. costof'living record was generally in line with the experience.of most
maj or industrial nations in the 1955-60 period and it was~ considerably better than the
major industrial countries during the 1960-66 period. After rising at about a 2
percent rate in the 1955-60 period, the U. S. cost of living advanced at the slower
rate of approximately 1.6 percent in the 1960-66 period.
Since 1966, U.S. performance has been less favorable than earlier. The chart
shows that 1967 and 1968 consumer prices rose 2,8 percent and 4.1 percent,
respectively. These rates of advance are not less favorable than in some other
industrialized countries. However, they do suggest the need for fiscal restraints.
PAGENO="0077"
Chart 11
ANNUAL RATE OF COST OF LIVING INCREASE
U.S. cost of living increases have been smaller than abroad
`0
1955-'60 1960-'67
6
4
2
(L (t-.ft)
*~frg/ eleven mon/hs of /968 over first eleven months of /96?
Source: Labor Department and OECD.
Office of the Seceetary of the hroeoay
PAGENO="0078"
Chart 12
Americans enjoy a lower tax burden than any of the major industrial countries
of Wes tern Europe and this includes taxes levied at all levels of government
Federal, state, and local. As shown in the chart, estimates based on.data compiled
by the Organization for Economic Cooperation and Development show that~ :as a proportion
of total national production, French citizens paid 38.5 percent in taxes; Germany,
34.4 percent; Italy, 29.6 percent; United Kingdom, 28.6 percent; and the U. S.,
27.3 percent. The figures are based on data for 1966. Little change in these
percents has occurred since then.
PAGENO="0079"
Chart 12
TAX BURDEN ~N SELECTED COUNR~ES*
Total Federal, State and Local Taxes as ~ of GNP
United States taxpayers have a lower tax burden than other major industrial countries
40
40
I
%
2" ~
30
20
I0
0
30
20
I0
* Italy
Based on OECD dab for/966.
0
Office of the tecretcey of the Tcresoey
PAGENO="0080"
Chart 13
One factor in the proposed tax increase which should not be overlooked
is. the amount of tax savings which results from actions taken after 1963.
These tax savings, which were over $8 bIllion in~ 1964, will rise to nearly
$24 billion in l969~ Even after the, increases passed in 1968 andassuming
enactment of those proposed, the savings in 1969 would still come to over
$12 billion. Thus, even with .the proposed tax increase, American taxpayers
are still far ahead of where they would have, been were tax rates to have
remained at pre~'l964 levels.
PAGENO="0081"
Chart 13
TAX.SAVINGS FROM ACTIONS TAKEN AFTER 1963
Taxpayers will continue to benefit from huge tax savings after
and enacted tax increases*
0
Tax increase
$BiI.
25
Tax increase
enacted
I0
Tax increase
proposed
5
Tax Savfrigs
20
IS
10
5
0
1965 -
Calendar Years
*7~ increases exclude amounts from continua/h,,, of excise tax rates.
Office of the Secretory of the Treasoty
PAGENO="0082"
Chart 14
The proposed continuation of the surcharge at 10 percent for the full
calendar year 1969 would still leave individual taxpayers paying much less
income tax than they did in l963~ For example, a married couple with two
dependents and a wage arid salary income of $7,500 would have, a 1969 tax
liability of $755 instead of $877 at 1963 rates `a saving of $122.
Savings at other income levels are shown in the chartb
PAGENO="0083"
Chart 14
TAX SAVINGS AT 19~9 [PROPOSED RATES
COMPARED WITH 1963 RATES
Wage or Salary Income, Married Couple, Two Dependents
$ Thous. $ Thous.
Total Tax at 1963 Rates_
Total Tax at 1969 Proposed Rates
8
6
4
2
0
$465~
* __
$2I8~
$I77~
$I22~
$61 $I3O~_____
8
6
4
2
I 0
3,000 5,000 7, ~TTh,
WAGE OR SALARY INCOME (DOLLARS THOUSANDS)
Office of the Secretory of the Treasury
PAGENO="0084"
Chart 15
The tax savings at 1969 proposed rates are relatively greatest at lower
wage and salary levels, as' shown in the chart0 For example, at 1969 rates,
a married couple with two dependents and wage and salary income of $3,000
would still save about 94 percent of their total 1963 tax liability. (There
would be no increase in 1970 tax for a married couple whose tax at 1967
rates was $290 or less.)
PAGENO="0085"
Chart 15
AT 1969
PERCENT
100 -
80 -
60
40
TAX SAVINGS AS A PERCENT OF 1963 TAX:
PROPOSED RATES COMPARED WITH 1963 RATES
Wage or Salary Income, Married Couple, Two Dependents
Tax Savings as a Percent of 1963 Tax
r,~i~i i
100
80
6C
40
9% 9% 9% 9% 8%
- - -) 12,500 15,000 20,000 25,000 35,000
WAGE OR SALARY INCOME (DOLLARS THOUSANDS)
9A
20
0
20
0
Office of the Secootery of the Treosuiy
PAGENO="0086"
Chart 16
The liquidity deficit was between $1.3 billion and $1.4 billion in each of
the years. 1965 and 1966---only a third as large as the 1959-1960 average.
In 1967, our attempts to restore balance in our international accounts received
a severe setback and the deficit rose sharply to $3.6 billion. The uncertainties
and unrest which accompanied the sterling devaluation in November, 1967, accentuated
our problems. However, this deterioration also reflected the effects of higher
costs in Vietnam, heavy unilateral transfers, a disappointing trade surplus, and
increased outlays by U. S. citizens traveling abroad.
In 1968, despite a strong upward surge of imports stimulated by domestic
inflation, a strong rate of real GNP growth ~nd various strike situations, the
liquidity deficit disappeared and a small balance-of--payments surplus emerged.
The improvement, however, was not well balanced as among various accounts.
The trade surplus fell well below $1 billion and the tourist deficit continued
at a high level. Also, some of the sharp improvement in the capital accounts was
the result of restraint programs which are not permanent features of our system.
The over-all results, however, are encouraging and have been reflected, in part, in
a net increase in our gold stock during the second half of last year.
PAGENO="0087"
Chart 16
U.S. BALANCE OF PAYMENTS ON !~LIQUIDITY~~ BASIS
AND GOLD SALES
1958 `59
*RoUfl~/e~/e/ figure.
Note: includes sc/es for domes/ic i~idus/r/c/ dndL
rn//i/on of gold,?? /960 end $150 rn//I/on hi
i?icreuses hi /965
PAGENO="0088"
Chart 17
Since only increases in liabilities to foreign official holders (plus changes
in U. S. *reserve assets) are used to measure the official settlements balance,
its changes from year to year reflect to a considerable extent shifts of dollar
holdings between foreign private and foreign official holders in response to
relative interest rates, here and abroad, and currency speculation.
The downward trend in the official settlements balance from 1960 through 1966-~
when there wa~ a small surplus--was. interrupted in 1967 due in part to the outbreak
of private gold speculation in the Fall of that year.
In 1968 the official settlements balance moved into a strong surplus position,
particularly in the `second quarter of the year, reflecting a loss of reserves from
official holders, parcicularly France. The tighter credit conditions in the U. S.
towards the end of the year also helped to accentuate the 1968 official settlements
surplus.
PAGENO="0089"
Chart 17
U.S. BALANCE OF PAYMENTS ON eeOFFICIAL SETTLEMENTS"
BASIS AND GOLD SALES
*Rd~//~ fi~iure.
Note. The official setilements ba/once counts changes in dollar c/aims of foreign official monetary
authorities - but no/private holdings - in addillon to reserve losses of the US. The
liquidity balance counts changes in the llquid dollar ho/dui~s of all foreigners - private
and pub/ic - as well as losses in reserves
PAGENO="0090"
Chart 18
The U.S. international reserve position improved following establishment
of the two-tier gold system in March 1968 and enactment of the fiscal
restraint package at midyear. There was a rise in U0S0 reserve assets from
a low of $13.8 billion in the spring of this year to $15.8 billion by year-
end. Gold losses were checked after the first quarter. By the end of the
year, all U.S drawings on the International Monetary Fund had been repaid.
Federal Reserve swap lines were enlarged during the year to a total of
$10.5 billion.
PAGENO="0091"
Chart 18
U~S. RESERVE ASSETS A~D
FEDERAL RESERVE "SWAP" LINES, LATE 1968
Total U.S.
Reserve Assets
$15.8
billion
Reserve
Position
InIMF?
$1.3
billion
I I
~BiI.
Gold
12
Federal Reserve
~Swap"Lines
$IO.5**
billion
8
0
Convertible
Foreign
Currencies
* Legiciati~rn in early 68 removed/he 25% goldcoverrequirementandfreeo'/he US gold stock for
i/7/ernatlona/traithactions.
°~ US gold tranche po~cili~n, which is available virtually automatically if needed. tinder appropriate conditions/he US.
cou/ddrawao'r//tiona/amounts equa//o/he US.quo/aof$5/6Obill/on.
~US drawiigs were less/han $0.5 billion at/he end of /9 68.
Office office Secret&y of the boecey
PAGENO="0092"
Table 1
FEDERAL SPENDING AND RECEIPTS, NIA AND UNIFIED BUDGETS
(In Billions of dollars)
Actual Estimate Change from Previous Year
1965 1966 1967 1968 1969 1970 1965 1966 1967 1968 1969 1970
~~enditure Account Basis
Receipta 116.8 130.9 1~9.6 153.7 186.1 198.7 ~ +1!~.1 +18.7 +Z~.l +32.1~ +3.2.6
Expenditurec (excludea
net lending) 117.2 130.8 153.3 172.8 182.3 i9i~ -0.8 +13.6 +22.5 +19.5 +9.5 +12.1
Surplus or deficit _0.l~ 0 -3.7 -19.2 +3.8 +1h3 +5.0 ~ -3.7 -15.5 +23.0 +0.5
Net lending 1.2 3.8 5.1 6.0 1.1~ 0.9 +0.7 +2.6 +1.3 +0.9 -b.6 -0.5
Total Unified Budget
Receipte 116.8 130.9 lk9.6 153.7 186.1 198.7 +1~.l +lk.1 +18.7 +1~.l +32.1~ +12.6
Outlays (expenditures
and net lending) ll8.1~ 131h7 i58.1~ 178.9 183.7 195.3 -0.2 +16.3 +23.7 +20.5 +1~.8 +11.6
Surplus or deficit -1.6 -3.8 -8.8 -25.2 ~ +3.1~ +1h3 -2.2 -5.0 _i6.1~ +27.6 +1.0
Office of the Secretary of the Treacury
January 15, 1969
PAGENO="0093"
Table 2
UNIFIED BUDGETP RECEIPTS AND ESCPENDITURES,
VI~NAM AND NON-VIETNAM
Fiscal Years
1967 1966 l969(~) 1970(el
Unified Bu4~et
Total outlays 118.6 118.14 131#.7 158.14 178.9 183.7 195.3
Total Receipts 112.7 u6.8 130.9 1149.6 153.7 166.1 198.7
(Surplus or deficit) -5.9 -1.6 -3.8 -8.8 -25.2 2.14 3.14
Total ~lays, By Type
Vietnam 0.1 6.1 20.6 26.8 29.2 25.7
Non-Vietnam
Trust 22.7 23.2 26.1# 31.6 35.5 39.6 1~1~*~
Other 95.9 95.1 102.2 l06~2 u6.5 115.0 125.5
Total Receipts~, By~ype
Vietnam Receipts 1.2 14. 6~/ 1. 5~J 16.5 Y
Non-Vietnam Receipts 112.7 116.8 129.7 1145.0 152.2 169.6 181.5
Non-Vietnam outlays 118.6 118.3 128.6 137.8 152.1 1514.5 169.6
Non-Vietnam Receipts 112.7 u6.8 129.7 1145.0 152.2 169.6 181.5
(Surplus or deficit) -5.9 -1.5 1.1 7.2 0.1 15.1 11.9
~[Deferra1 of scheduled reduction in excise taxes on telephone service and automobiles.
~/ Tax Adjustment Act of 1966.
~/ Deferral of excise tax reduction.
Effect of the Revenue and E~cpenditure Control Act of 1968 actual and proposed.
January 15, 1969
PAGENO="0094"
90
4.'
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p p 4'IH 01 Cu H H Ci Ci Cii Cu H Cu en in rn-o In LC'.0 `0'-0 0' N- ~
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~n Lii Lii Lii ICi C) Lii Lii Lii o-i Lr\0'.0'.0\0\0'Q C) `P `P \0'0 H'O ~
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PAGENO="0095"
Table 14
Comparison of Tax Liabilities Under Proposed Surcharge Continuation !J
Single Individual
1967 : 1968 : 1969 :
Wage : 1963 : : Change : : Change : : Change : Change : : Change
income : tax : Tax ~ : from 1963: Tax ~ : from 1967: Tax ~-~` from 1968: from 1963: Tax ~1 : from 1969
$1,000 $ 62$ 16$ -146$ 16 $0 $ 16 $0 $-146 $ 16 $0
1,900 * 2214 1147 -77 1147 0 1147 0 -77 1147 0
2,000 2142 163 -79 166 3 167 1 -75 165 -2
3,000 1427 333 ~914 358 25 366 8 -61 350 -16
5,000 818 671 -1147 721 50 738 17 -80 705 -33
7,500 1,1405 1,168 -237 1,256 88 1,285 29 -120 1,226 -59
10,000 2,096 1,7142 -3514 1,873 131 1,916 143 -180 1,829 -87
12,500 2,887 2,398 -1489 2,578 180 2,638 60 -2149 2,518 -120
15,000 3,787 3,1514 -633 3,391 237 3,1469 78 -318 3,312 -157
20,000 5,900 14,918 -982 5,287 369 5,IslO 123 -1490 5,161# -2146
25,000 8,3214 6,982 -1,3142 7,506 5214 7,680 1714 -6114 7,331 -3149
35,000 13,778 11,627 -2,151 12,1499 872 12,790 291 -988 12,208 -582
Office of the Secretary of the Treasury January 114, 1969
Office of Tax Analysis
Note: There is no surcharge increase in 1968, 1969 or 1970 for a single person whose regular tax is
$1145 or less.
See other footnotes on last ~sge. -
PAGENO="0096"
Table 5
Comparison of Tax Liabilities Under Proposed Surcharge Continuation ~J
Married Couple, Two Dependents
Wage : 1963 : : Change :
income : tax : Te,c ~" :from 1963:
:
Tax ~"
Change
from
:
: :
Tax ~
Change
..
Change :
1970
: Change
Tax ~
$ 3,000 $ 65 $ 14 ~- 61
$ 14
$ 0
:
$ 1~
from 1968
$ 0
:from .1963:
$- 61
:from 1969
$ 14 $ 0
5,000 1420 : 290 - 130
7,500 877 686 - 191
290
737
0
51
290
755
0
18
-130
-122
290 0
720 - 35
10,000 1,372 . 1,1114 - 258
1,198
814
1,225
27
-1147
1,170 - 55
12,500 1,901 1,567 - 3314
1,685
118
1,7214
39
-177
1,6145 - 79
15,000 2,1486 2,062 - 14214
2,217
155
2,268
51
-218
2,165 -103
20,000 3,800 3,160 - *614o
3,397
237
3,1476
79
-3214
3,318 -158
25,000 5,318 4,1412 - 906
14,7143
331
4,853
110
14,633 -220
35,000 9,037 7,529 -1,508
8,0914
565
8,282
188
-755
7,905 -377
Office of the Secretary of the Treasury
Office of Tax Ahalysis
Janü~y 15, 1969
Note: There is no surcharge increase in 1968, 1969, or 1970 for a married couple whose regular tax is
$290 or less,
See other footnotes on last page..
PAGENO="0097"
Table 6
$ 2,000 $ 122 $ 58 $- 6~ $ 58
3,000 305 20l~ - 101 20~
3,600 I~l3 29I~ - 119 295
5,000 660 501 - 159 533
7,500 l,11a 9]A - 227 983
10,000 1,636 1,962 - 296 l,I~i~3
12,500 2,213 1,831 - 382 1,968
15,000 2,810 2,335 - I~75 2,510'
20,000 ~,l92 ~ 708 3,71~5
25,000 5,77l~ 1~,796 - 978 5,156
35,000 9,601 7,997 ~l,601~ 8,597
$o~$ 58 $0 $-611 $58 $~
0 20~ 0 -101 20I~ 0
101 l,~176 33 -160 1,~t09 - 67
137 2,0l~~ 46 -199 1,923 . - 91
175 2,568 58 -2~2 2,1452 -116
261 3,832 87 -360 3,658 -1714
360 5,276 120 ~1498 5,036 -2140
600' 8,797 200 -8014 8~397 -1400
~r~ce 01. tflC becretlry oi' toe `~reasury
Office of Tax Analysis
January 14,
Note: There is no surcharge increase in 1968, 1969, or 1970 for a married couple whose regular tax is $290
or less.
0
Comparison of Tax Liabilities Under Proposed Surcharge Continuation ~J
Married CoMple ,NoDependents
19b7 : l9bli : 1969 : 1970
Wage 1963
Change : : Change : 4 : Change : Change : : C ange
income : tax : Tax ~/ from 1963: Tax ~ :from 1967: Tax ~1 from 1968:from 1963: Tax ~/ :from 1969
1 295 0 -118
32 5143 10 -117
69 1,005 22 -136
2914 - 1
522 -21
960 -145
See other footnotes on ]mat ~ge.
PAGENO="0098"
Footnotes:
Tax liabilitiesassume minimum standard deduction or deductions equal to 10 percent
of income, whichever is greater. Tax liabilities from optional tax table where
income is under $5,000.
From tax schedule revised in l961~ Tax Act.
~J Includes 10 percent tax surcharge effective from April 1, 1968 to December 31, 1968
(i.e., 7-1/2 percent for calendar year). Surcharge liability from tables contained
in the Revenue and Expenditure Control Act of 1968.
~/ Includes 10 percent tax surcharge proposed for full year. Surcharge liability com-
puted as 10 percent of adjusted tax, but not to exceed 20 percent of adjusted tax
in excess of $lti5 for single returns and $290 for joint returns.
~j Includes 10 percent surcharge proposed for one-half year, effective from January 1,
1970 to June 30, 1970 (i.e., 5 percent for calendar year). Surcharge liability from
tables prescribed for calendar year 1969 in the Revenue and Expenditure Control Act
of 1968.
PAGENO="0099"
95.
Chairman PATMAN. Now, Mr. Arthur M. Okun, Chairman of the
Council of Economic Advisers. Mr. Okun, we will be glad to hear
from you.
STATEMENT 0]? HON. ARTHUR M. OKUN, CHAIRMAN OP THE
COUNCIL OP ECONOMIC ADVISERS
Mr. OKTJN. Thank you, Mr. Chairman. In our closing days in of-
fice I can think of no more welcome opportunity for a valedictory
than an appearance before this committee. As a member of the Council
for 41/2 years and as its Chairman during the past year, I have profited
greatly from the advice, assistance, discussions, and consultation which
the Joint Economic Committee has provided. The Council and the
Joint EcOnomic Committee are in a sense twin institutions on the ex-
ecutive and the legislative side and we have worked together effec-
tively in promoting an unprecedented 8 years of economic expansion.
I wanted to turn my attention today to some of the tasks and prob-
lems that you ~~eople will continue to face ill office and I will be ob-
serving as a private citizen in promoting a ninth year of unparalleled
economic expansion for the Nation.
As 1969 begins, there is distinct evidence that the economy is mov-
ing toward improved balance. The advance of real output decelerated
significantly from a 6½-percent rate early in 1968 to 4 percent by
yearend. Still, a further slowdown is essential to achieve progress
toward price and cost stability, to relieve pressures on our financial
markets at home, and to strengthen our international trade
performance.
Given the current situation and outlook, the fiscal restraint pres-
ently operating cannot be relaxed. It must be continued throughout
1969 and into 1970. Director Zwick will outline the administration's
stringent program for Federal expenditures. On the revenue side an
early expiration or reduction in the tax surcharge would be an un-
justified and unwarranted move to fiscal stimulus in an economy that
continues to need the firm hand of moderation. With the extension of
the surcharge, the President's fiscal program seems well designed to
meet the key objectives of providing moderation and yet avoiding
excessive weakening of demand. Drastic restraint might make for
somewhat faster improvement in our price performance, but only by
imposing unconscionable human costs and enormous waste on the
Nation.
1~ACKGROUND OF THE OTJTRRENT Srr~ATIoN
To understand the current economic situation and tasks of policy, it
]5 necessary to consider developments of the economy since the middle
of 1965. At that time, we were advancing healthily in the longest and
strongest peacetime expansion of our history. The subsequent upsurge
in defense spending reinforced a strong advance of business invest-
ment, creating an unsustainable boom. From the second quarter of
1965 through the first quarter of 1966, the economy advanced much too
rapidly. Prices and wages moved sharply upward in response to pres-
sures of demand-particularly because of the speed at whicji demand
was growing. Despite several measures adding-to taxes and despite
restraint in Federal civilian programs, fiscal policy was too stimulative
PAGENO="0100"
96
in 1966, as defense requirements kept rising. In retrospect, there is
general agreement that a tax increase would have been desirable at
that time.
The economy experienced a welcome slowdown late in 1966 aided by
a strong dose of monetary restraint. From late. 1966 to the summer of
1967, the trend of prices improved, although it was still pushed up
by earlier cost increases. Consumer prices and the overall price index
of GNP both rose at annual rates of less than 21/2 percent in the first
half of 1967. Interest rates re.treated, reflecting both the change of
pace of activity and the shift. toward easier monetary policy.
As of mid-1967, when t.he economy began to emerge. from an inven-
tory adjustment, we were moving back onto the track of reasonable
price stability, and we were preserving our prosperity. To head off a
new upsurge, the President then urged immediate enactment of a
10-percent surcharge on income taxes. If that recommendation ha.d
beeii promptly accepted, the economic history of the past year and a
half would have been considerably more favorable.
RECORD OF 1968
1,~Tithout action on taxes, however, the Federal budget became an
engine of inflation. In the first half of 1968, the new boom took hold
and prices advanced at a disturbing 4-percent rate. This was accom-
panied by a jump in imports; nervousness in international financial
markets; and pressures on financial markets at home, which could not
be appropriately accommodated by monetary policy.
By the time t.he Revenue and Expenditure Control Act became law
in June, priva.te demand was very strong and it had developed great
forward momentum. There was a significant slowdown in the second
half but not as large or prompt as we had expected and hoped. Late
in the year, business investment spending moved strongly upward from
its earlier plateau. Housing rebounded in the face of tighter credit
conditions. Consumer spending rose sharply in the summer months.
But the marked slowdown of consumption in the fourth quarter
showed that the tax surcharge had begun to exert a. restraining impact..
Thus, in some respects, 1968 was too big a year. Yet., the. unprece-
dented 8th consecutive year of expansion brought a 5-percent gain in
real output, a 2.1-million rise in nonfarm payrool employment, and
a decline in the unemployment rat.e of 3.6 percent-indeed, to 3.3 per-
cent by yea.rend.
OUTLOOK FOR 1969
The outlook points to a further appropriate slowing of overall activ-
ity in the first half of 1969. Inventory investment, is likely to retreat
from its recent unusually high rate. Although, the saving rate of the
consumer could move downward, t.he growth of consumer spending is
likely to be moderate. Homebuilding will do well to stay near current
levels in today's financial markets. And indeed the 15-percent decline
in housing starts for December reporte.d today indicates the problems
that housing may be beginning t.o have in these markets.
Federal purchases should change very little. Current evidence sug-
gests that, in the first ha.lf-GNP may rise at. an annual rate between
5 and 6 percent-slowly enough to achieve a desirable cooling off, but
rapidly enough to maintain dist.inct advances of output and
development.
PAGENO="0101"
97
If the tax surcharge were to expire at midyear, a marked fiscal stim-
ulus would be applied to the economy, and a renewed major accelera-
tion of activity would be likely. The only visible alternative to that
acceleration in the event of expiration of the surcharge, would be a
drastic dose of monetary restraint-a remedy which we should clearly
avoid. Monetary restraint could do the job of stopping any incipient
boom but it could do so only by pressing unevenly on homebuilding
and its credit sensitive sectors of the economy and by disturbing the
flows of credit in our financial markets.
In view of this diagnosis, I believe, one can conclude that the whole
Nation will benefit if Congress makes clear that a timely and favorable
verdict on the extension of the surcharge will be forthcoming. Of
course, if peace is achieved, if the expenditure outlook changes mark-
edly for other reasons, or if private demand softens dramatically, the
program will require review. In that event, an easing of monetary
policy-we well as an adjustment of fiscal policy-could respond to
the changing needs.
To meet the possible need for flexibility in fiscal policy, the President
has suggested that Congress review its procedures for changing tax
rates. He has suggested that, for the immediate future, it might be
desirable to give the President discretion to remove the surtax in whole
or in part, subject to congressional veto. For the longer run, lie sug-
gests that Congress might give the President continuing limited au-
thority to adjust tax rates up or down as needed for stabilization
purposes, again subject to congressional veto. Or, alternatively, the
Congress could reform its own procedures in such a way as to assure
a prompt verdict-either way-on a Presidential request for stabiliz-
ing tax legislation.
I know this committee has studied these issues long and hard over
the years. I think, in light of the experience of the past 2 years, another
look at this important issue is in order.
With appropriate fiscal action, we look forward to a healthy but
moderate advance in 1969. For the 4th year in a row, the unemploy-
ment rate should remain below 4 percent. Real incomes should advance
generally, and prosperity should be extended. We should witness a
moderation of import demand, a reduction of pressures in financial
markets, and gradual moderation in price and wage increases.
We cannot, however, expect rapid or dramatic improvement in the
trend of prices. The price-wage spiral simply cannot be halted within
a single year.
ROAD TO PRICE STABILITY
Rather, we must look toward a gradual return to reasonable price
stability in a prosperous environment. This will require first and fore-
most, high standards of fiscal and monetary policy. But those policies
cannot do the job alone. They will need to be reinforced by measures
to enlist voluntary restraint in the price and wage decisions of large
corporations and strong unions. They will need to be reinforced by
measures to improve the structural efficiency of the economy. In chap-
ter3 of the Council's report, we spell out a variety of private and public
actions that may help to improve the price performance of a prosper-
ous economy. These are an agenda for exploration rather than a pro-
gram of specific reforms or legislative proposals. We do want to stress
that the battle against inflation must be fought on many fronts. It must
include steps to improve mobility and efficiency of our labor markets,
PAGENO="0102"
98
to continue on the course of freer world trade, and to strengthen
productivity and competition in our industries.
o'rHER ISSUES
The Council's report also contains a detailed discussion of the inter-
national monetary system and of many proposals for further improve-
ment in its operation. We hope our analysis will contribute to the
careful and intensive dialog which must precede the adoption of any
reforms.
Our report also analyzes the problem of poverty in our prosperous
economy. The number of Americans below the poverty income line has
declined from roughly 40 to 22 million between 1960 and 1968. We have
a considerable way to go, but our recent progress certainly argues for
redoubling our efforts rather than relaxing in the war on poverty.
When we are at a. position where 1 percent of our gross national
product, if handed out individually to all the people who are poor,
would be sufficient to bring them up to the poverty line, it seems a
shame to have a continuing major blemish of poverty among 11 per-
cent of our citizens.
Finally, let me point to the report of the Cabinet Coordinating
Committee on Economic Planning for the End of Hostilities in Viet-
nam. It summarizes the studies made over the past 2 years to provide
some guidance on how the Nation can best make the economic transi-
tion to peace. When that welcome day arrives, fiscal and monetary
policy will be confronted by demanding challenges, but they should
be equal to the task of promoting a reasonably smooth transfer of
resources from the uses of war into the service of peace.
Thank you.
Chairman PATMAN. Thank you, sir.
Our next witness is Charles J. Zwick, Director of the Budget. We
are glad to have you, sir, and you may proceed in your own way.
STATEMENT OF HON. CHARLES ~. ZWICX, DIREC~TOR OP THE
BUREAU OP THE BUDGET
Mr. ZwIoK. Thank you, Mr. Chairman.
First, let me second the comments of my colleagues. I found the
exchanges with this committee to be both productive and gracious. I
think they were important to policy formulation, and in leaving, we
leave with the greatest of respect for this committee.
I have a prepared statement., Mr. Chairman, but in the interest of
time I would be happy to paraphase it and submit it for the record,
if acceptable.
Chairman PATMAN. WTithout object.ion, so ordered.
We will also include Secretary Barr's prepared statement in the
record along with the supplementary materials.
Mr. ZwI0K. I would like to make a few comments and work from a
set of charts that you have labeled the "1970 Budget Charts." You have
some charts aiso from the Treasury there if you can distinguish be-
tween them.
Chairman PATMAN. Would you like to have it in the record at this
point?
Mr. ZwICK. Yes.
(The "1970 Budget Charts" referred to follow:)
PAGENO="0103"
~~tllgt~t T~t~s, ~
Executive Office of the President / Bureau of the Budget
PAGENO="0104"
BUDGET AUTHD~TY A~D OUTLAYS F~ ~ TO
PUBLOC Li~W 90-364
$ Billions
Description
,
January
1968
estimate
Current
estimate
Change
BUDGET AUTHORITY
Programs excepted from Public Law 90-364
limitation_____________________________ $98.4 $104.6 +$6J
Remainder-covered by Public Law 90-364
limitation________________________________ 103.3 90.1 -13.2
Total budget authority___________ 201.1 194.6
BUDGET OUTLAYS
Programs excepted from Public Law 90-364
limitation~ 92.6 98.6 +6.0
Remainder-covered by Public Law 90-364
limitation _~ 93.5 85.1 -8.3
_____________ 186.1
Total budget outlays~~
183.1 -2.4
PAGENO="0105"
~g~t
$BiIIions
$224.0
NOTE: Amounts have not been Adjusted for:
INTERFUND AND INTRAGOVERNMENTAL TRANSACTIONS
PROPRIETARY RECEIPTS FROM THE PUBLIC
1968 1969 1910
6.9 8.7 9.1
4.7 4.6 4.8
1968 1969 1910
E~1ACTED ESTIMATED PROPOSED
Executive Office of the President Bureau of the Budget
PAGENO="0106"
I.
1970 Budget - Relation of Budget Authority to Outlays
Figures in brac'~~~- Federal funds only
/~ Unspent Authority
` Enacted in Prior Years
226.1
[126.5]
Unspent Authority
for Outlays in
Future Years
To be held for Outlays 239.2
in Later Years 138.5 ~ [128.3]
[76.7]
I
PAGENO="0107"
~Sg~t &o&iys, *~k~J~J1O
Fiscal Years S Billions-Estimated
Ii
[Social Insurance Trust Funds
Other ~1ajor Social Programs
j+20
Federal Pay Increase
Lhl~1.e5t
~JationaI Defense
All Other Programs Excludes Undistrihuted lntragovernmental Transactions
Executive Office of the President / Bureau of the Budget
PAGENO="0108"
T~~s ~ ~ ~~gaEi ~t~js~ ~4~i~Th
Hscal Years Estimateil PerceUta~e Increase
~ +123%
~iajor Social Programs
+65%
~lOiitlays
~ +63%
Interest
Vietnam +52%
~jatjonaI Defense
~!eterans
~
All Other Programs
Executive Office of the President I Bureau of the Budget
PAGENO="0109"
1I~~I~ 1~ki] ~ ~ ~ L~D~]EJ ~
~13UIions 25.0
25~ ioia I
2U~.
Communhty~. flevolopment Other~.."
aud ~1uusing~,/'
Health and Welfare
Construction
I I I ~__l ~l I I
~i~J~i ~J~X~1I 1~JO3~ U~X~3 1J~~X~4i U~X~ fl~X~ 1J~X~V .X~AB 1J~X~i~J [I~JV~
E~t~t~ V~i~ 1iiLt~
c~i
Executive Office of the President! Bureau of the Budget
PAGENO="0110"
106
Secretary BARR. Mr. Chairman, the charts that were presented in
my statement, may they be included in the record, too?
Chairman PATMAN. Yes, sir, they may be included with your
statement.
Mr. ZWICK. The first chart gives the budget totals and the deficit-
surplus situation. I would like to make three quick points with regard
to this chart.
First, as the chart shows, there is a. desirable turnaround from a
big deficit in fiscal 1968 to a surplus for both fiscal years 1969 and
1970. A surplus of $2.4 billion is predicted for 1969 and another of
$3.4 billion is estimated for fiscal 1970. As my colleagues have said, we
believe this is a.ppropriate to the economic and fiscal situation we are
now facing.
The second point. I would like to make is that. the 1969 expenditures
and revenue estimates are at this point, we believe, quite firm. We are
6 months through the year. Absent any major events-and, of course,
something like a Middle East explosion could change this-but ab-
sent a.ny major uiiforseen events, we think these are pretty accurate
estimates. I first draw your atteiit.ion to the $183.7 billion expenditure
estimate for fiscal 1969. That compares with the $186.1 billion we pro-
jected a year ago this time and the $184.4 billion `level that we pro-
jected in t.he midyear review last September.
Now, briefly, we have 5 months of objective information available
to us, from July through November of this year. On the basis of those
5 months, if you adjust for the seasonalit.y in the agricultural programs
and construction programs-for example, t.he Corps of Engineers
speiids about 60 percent of its money in the first 6 months of any fiscal
year because the work is done in the summer and the bills are paid in
the fall-if you adjust. for seasonalit.y, outlays have been running in
the first 5 months of this fiscal year at. a rate of $181 billion. So, there-
fore, from here oii out, the new administration can have outlays run-
ning a.t a rate of about $187 billion for the rest of the year and still
meet the estimated expenditure level of $183.7 billion.
Second, we do have a. preliminary estimate for Defnse for the month
of December. It will be about. another w-eek before the Monthly
Treasury Statement comes out for the month of December but we do
have a preliminary estimate for the Defense and military assistance
for the month of December. On the basis of that. preliminar~~ estimate,
we believe that Defense and military assistance expenditures for the
first 6 months of this year will be $381/2 billion.
Now, the 1970 budget estimates Defense expenditures for fiscal year
1969 as a whole at $78.4 billion. In `other words, the new administra-
tion can spend another $40 billion and still meet the $183.7 billion
target that we are talking about. So, we think, absent any major
change of events, and a continuation of the policies and procedures
we have instituted, that the $183.7 billion is a fairly firm estimate
of where we should be coining out in expenditures in 1969.
Similarly, data on 1969 revenues are prett~r advanced and, there-
fore, the $2.4 billion surplus ought. to be a quite good number.
The third point. I would like to make with regard to this chart. is
that if you look at the increase in expenditures over the 2-year period
1968-1970-there has beeii some distortion in the 1969 figures because
of the Revenue and Expeiiditure Control Act of 1968-if you look
PAGENO="0111"
107
over the 2-year period, 1968 to 1970, you will find that expenditures
have gone up from $178.9 to $195.3 billion, an increase of $16.4 billion,
or, on the average., $8.2 billion a year. That is a fairly modest increase,
I would say. Of that $16.4 billion, about $7 billion is trust fund in-
creases. So, if you subtract out the trust fund increases, you have had'
an increase over 2 years of a little over $9 billion for Federal funds,
an increase of $~½ billion a year.
Now, there is something like between 3 and 4 percent growth, about
half as fast as the economy is growing. Therefore, this is indeed, in
our estimation, a very tight budget.
The second chart, very briefly, is a table which shows what has
happened under the Revenue and Expenditure Control Act of 1968
(Public Law 90-364). There were two mandatory provisions, as you
are aware, with regard to appropriations and expenditures. One was
that appropriations should be cut by at least $10 billion and the other
was that expenditures should be reduced by $6 billion-in both cases
excepting certain programs. The first bank of this table says that the
Congress, plus reestin'iates, accomplished the first requirement of the
law. Budget authority for the programs covered by the law is cut by
$13.2 billion, so the administration did not have to take any further
actions.
The second bank of figures on the chart says that we are not only
cutting $6 billion but we are cutting $8.3 billion in the expenditures
covered by the law, and that comes about through a series of special
circumstances.
At the time of the midyear review, when we appeared before this
committee, we were estimating a cutback in expenditures of about
$6i/2 billion. At that time, as I indicated to you, we were assuming we
had to absorb the increased costs of public assistance and CCC pay-
ments w-ith the extra large worldwide crop this sear.
Subsequent to that, Congress exempted the CCC overnrns, the
public assistance overruns, and $100 million for impacted school aId.
It also enacted two laws which allowed the banks for cooperatives and
the intermediate credit ba.nks to convert to private ownership and
therefore fall outside of the budget. The special circumstances asso-
c~ated with aliof those a.ctions-a-nd---other-~s-mallerclmrges brought us
up to about an $8.8 billion reduction in expenditures. We did put some
money back into 1-IEW and Agriculture as we promised we would if
Congress enacted the exemptions for public assistance and CCC. So
the net of all these factors led to an estimated reduction of $8.3 billion
in expenditures.
The next two charts are technical charts on the appropriations
process. I would suggest we skip them and go to a fourth chart whi~h
gives a breakdown as to what the changes are in the 1969-70 budget
situation.
Chairman PATMAN. All of them will be ilaced in the record.
Mr. ZwIcK. Thank you, sir.
Briefly, this chart points out that `of the $11.6 billion increase in
outlays between 1969 and 1970, $41/2 billion is in the social insurance
trustS funds; $2.9 billion of that increase is under existing law. The
remaining $1.6 billion increase assumes the enactment of the soc~al
security improvements that President Johnson recommended both in
the state of the Union message and in his budget message.
PAGENO="0112"
108
Outlays for other major social programs are up by $3.4 billion.
The major programs here include Model Cities, JOBS program-job
training programs in general, but the JOBS program in specific-the
program with the National Alliance of Businessmen, is doubled; it
goes from 70,000 positions in 1969 to 140,000 positions in 1970. Medi-
caid and public assistance are also increasing. Community facilities,
health, education, all of these are up from 10 to 15 percent. Feeding
programs are also up. Across the boa.rd, total food assistance for the
poor is up 44 percent from 1969 to 1970.
The other increases, then, are $2.8 billion for the Federal pay in-
crease coming in July 1969, $800 million for interest, national defense
up $500 million, and all other programs up $200 million.
Now, within that $200 million, however, there are a number of ups
and downs. In fact, there are $2.2 billion of ups and $2 billion of
downs. Programs for crime control are up about 35 percent. Overall,
the budget anticipates close to $900 million for crime control programs.
There are expansions in the highway program, and an expansion
in the airports and airways facilities programs, assuming that user
charge legislation is passed. We have two elements in the FAA budget:
One, about $45 million that we consider essentially a baseline increase
in FAA, and then another $150 million for a:irways development
contingent on the enactment of user charges to pay for these facilities.
So that you do have a number of ups, almost offset `by downs for the
postal deficit, the space program and other decreases.
But I think this chart indicates the priorities that the Johnson ad-
ministration has followed in putting this `budget together.
Now, the next chart takes a look at the six budgets that President
Johnson has submitted during his Presidency. The 1970 budget being
his last budget, we thought. it was appropriate to summarize the prior-
ities of the entire period, and the result looks very similar to the chartS
you just looked at. If you look over those six budgets from 1964
through 1970, the total of outlays-the total budget-goes up by 65
percent. Major social programs go up almost twice as fast, 123 percent.
Interest is up 63 precent. Nationa.l defense is up 52 percent, the major
part of that `being for Vietnam. Veterans programs are up 36 percent.
All other programs increased by 13 percent. So, I think the record is
quite clear as to the priorities that the Jolrnson administration has set
over the six budgets it submitted.
Lastly, let me say a few words about a subject on which I think
there needs to be some clarification-Federal aid to State and local
governments. The last chart in this series, I think, indicates quite dra-
matically the expansion in these aids, going from a $10.1 billion level
in 1964 to a $25.0 billion level in this budget, a 21/2 times iiicreases.
Compared with 1969, there is a $4.2 `billion increase in fiscal 1970 for
Federal aid to State and local governments.
This has meant a number of things. First., it means that State aiid
local governments are now- more dependent than ever on Federal rev-
eiiues for carrying out their programs. In 1964, approximately 15
percent of the revenues available to State and local governments came
from Federal grant programs. That now has increased to 18 percent.
So, in other words, almost 20 percent of the money available to State
and local governments to carry out their programs comes through
PAGENO="0113"
109
grant-in-aid programs from the Federal Government. There has been
a significant increase in these grant programs in recent years.
Second, there has been a major shift from rural to urban areas. I
am sorry that Senator Javits is not here, His earlier comments were
similar to those in the New York Times editorial yesterday on this
subject.
I think if you would look at the Special Analyses volume of the
budget you will find a sharply different picture than offered in that
editorial. While total grants to State and local governments have gone
up significantly, they have gone up even more rapidly to urban areas.
Federal grants to metropolitan areas have gone from $5.6 billion in
1964 to $16.7 billion in 1970, roughly tripling over this period. In the
1970 budget, 67 percent of Federal aid programs are going to urban
areas. That happens to be just about equal to the percentage of the total
population that lives in urban areas. So there has been a major shift
over these last 5 years in aid programs to urban areas.
Now, you can argue whether this shift has been fast enough or too
fast, but there has clearly been a major shift from rural to urban
emphasis. In 1964, 55 percent of Federal aid funds went to urban areas.
Now 67 percent goes to urban areas.
Lastly, I think it is important to indicate two additional sources of
support for urban areas. First, the tax expenditure analysis that Sec-
retary Barr gave you earlier indicated a~rn~orinvestmentJnui~bam-~
areas through tax credits, and secondly, the President recommended,
a.nd we think this is of critical importance, in his state of the Union
message and in his budget message, the creation of an Urban Develop-
ment Bank, a bank whereby moneys can be raised in the private mar-
ket and channeled at lower interest rates to urban areas.
So, I `think the record is quite clear that there has been a dramatic
and important shift to urban areas during this admini$tration. Whether
it was enough or too much is obviously a matter on which we probably
have as many opinions as we have people in the room. Mr. Chairman,
that summarizes my statement.
(The prepared statement of Mr. Zwick follows:)
PREPARED STATEMENT OF DIRECTOR OF THE BUREAU OF THE
BUDGET CHARLES 3. ZWICK
Mr. Chairman and Members of the Committee, my colleagues have discussed
the basic fiscal policy governing our overall tax and program recommendations
for the fiscal year 1970. Let me just run through briefly the budget totals and
some of the highlights of the budget outlay figures.
Given the uncertain outlook at this time with respect to Vietnam and the con-
tinued need for positive action to foster a return to relative price stability, we
believe that the appropriate policy is to plan for surpluses in the Federal budget
in the current and upcoming fiscal years. As you know, we ran a $25.2 billion
budget deficit in fiscal year 1968. As a result, the Federal Government's borrow-
ing requirements were exerting an extreme upward push on interest rates.
Now, for fiscal year 1969, we expect a sharp swing to a budget surplus of
$2.4 billion. The budget recommendations for 1970 should produce a further
surplus of $3.4 billion, with a restrictive expenditure policy and extension of the
income tax surcharge and current automobile and telephone excise tax rates for
another year. The fiscal restraint embodied in these surpluses-along with appro-
priate monetary policy and restraint by business and labor in `their price and
wage decisions-should contribute to an easing in the upward pressure on
interest rates, further improvement in our basic balance of payments position,
and a return to a sustainable rate of economic growth.
24-833 0-69-pt. 1---8
PAGENO="0114"
110
For fiscal year 1909, our estimates of outlays are, of course, influenced by the
restriction placed on us by the limitation on some outlays included in the Revenue
and Expenditure Control Act of 1968 (P.L. 90-364). Total outlays in 1969 are
now estimated at $183.7 billion, compared with the $184.4 billion we esitmated
last September in our Summer Review of the Budget. Actual data available for
the year so far indicate that in the first five months-July through November-
outlays ran at an annual rate of $181 billion, after correcting for the seasonality
of agricultural and construction programs. Therefore, we could have a rate of
about $187 billion for the rest of the year, and still hit the budget estimate.
BUDGET TOTALS
[Fiscal years. In billions[
Description
1968 actual
1969 estimate
1970 estimate
Budget receipts
Budget outlays
$153.7
178.9
$186.1
183.7
$198.7
195.3
Budget surplus (+) or deficit (-)
-25.2
±2.4
+3.4
We have a preliminary December figure for defense, including military assist-
ance, which gives us a half-year defense total of about $38.5 billion. The estimate
for the entire current fiscal year is $78.4 billion, so, again, defense could run at
a higher rate in the last half of the fiscal year-up to $40 billion-and w-e would
still make the estimate in the budget.
There are always unknowns in estimating, but all in all, we believe the 1969
estimates are sound. I might just add that for the programs excepted from
P.L. 90-364, outlays are now estimated $6 billion higher than last January's
budget. For those covered by P.L. 90-364, eve are showing a decline of $8.3 billion
from the original estimate, so that w-e are achieving the reduction required in the
law- and allowing leeway for unforeseen increases in the months ahead.
Turing to fiscal year 1970, I think the policy w-hich guided us in our program
recommendations can best be summed up by quoting a statement from the
President's budget message:
"This Nation can and must bear the cost of the defense of freedom and must
at the same time move ahead in meeting the pressing needs w-e face at home.
But caution and prudence require that w-e budget our resources in a way w-hich
enables us to preserve our prosperity, strength the U.S. dollar, and stem the
increased, price pressures w-e have experienced in the past few- years."
The estimates for 1970 reflect a restrictive expenditure policy generally, and
have also had to take into account distortions w-hich have arisen as a result of
the ceiling on outlays for 1969, which follow-ed on a statutory percentage formula
reduction in agency obligations enacted for 1968. We believed it would be unwise
to try to correct these distortions all in fiscal year 1970, and have therefore found
if necessary to continue a policy of outlay management in developing our 1970
estimates.
Within these constraints, the budget makes reasonable provision for ongoing
programs, including reductions w-herever possible, and proposes some selective
expansions in urgent domestic activities which the Administration has stressed
as a means of improving the lives of all Americans-for example, education,
health, manpower training, housing, community development, greater security
for the elderly, food assistance, and crime control.
In total, budget outlays are estimated to increase by $11.6 billion betw-een 1969
and 1970. Of this amount, major social programs w-ill be up by $7.9 billion, in-
cluding $4.5 billion in the social insurance trust funds. A part of the trust fund
increase reflects recommended legislation to raise overall social security benefits
by 13% effective January 1, 1970. including at least a 10% increase for almost
all beneficiaries, an increase in the minimum to $80 a month, an increase in the
earnings limit before benefits are lost, and other improvements in the system.
Other than through trust funds, outlays for major social programs are estimated
to rise by $3.4 billion, including-
A doubling of the JOBS program, from 70,000 slots in 1969 to 140,000 in
1970.
A continuation of efforts under the 10-year housing program, w-ith a goal
of starting about 500,000 low and moderate income housing units next year.
An increase of over $450 million for the Model Cities program.
PAGENO="0115"
111
Substantial increases for health, education, welfare, and other community
development programs.
Thus, the 1970 budget will maintain the momentum in key social programs,
while holding down other parts of the budget.
The Federal pay raise due to take effect in July 1969 accounts for $2.8 billion
of the overall increase. Interest costs will be up by $0.8 billion, while national
defense outlays are estimated to rise by $0.5 billion, reflecting-for the first time
in several years-an increase for forces not committed toSoutheast Asia support,
substantially offset by reductions in outlays for Vietnam.
Outlays for all ohter programs will increase, net, by only $0.2 billion. This net
rise reflects both increases-totaling about $2.2 billion-and decreases-totaling
about $2 billion. Major increases are provided for such activities as the highway
program, the recently-enacted safe streets program, and a proposed expansion in
our airways system contingent on enactmeoit of increased aviation user charges.
Among the decreases are a reduction in the postal deficit based on proposal postal
rate adjustments, reductions for Commodity Credit Corporation price support
operations and P.L. 480 shipments, and a continued decline in outlays for the
space program.
CHANGING STRUCTURE OF FEDERAL BUDGET OUTLAYS
[Fiscal years. In billionsl
1964 1968
Program actual actual
1969
estimate
1970
estimate
Change
1964-70
National defense $53.6 $80.5
(Special Southeast Asia support) (26.5)
Major social programs:
Social insurance trust funds (excluding medicare) 22.7 30.2
Welfare payments and services 3.4 4.6
Education and manpower training 1.6 6.4
Health (including medicare) 1.8 9.7
Low and moderate income housing (1) .9
Community and regional development .8 1.8
Subtotal, major social programs 30.4 53.7
Interest 9.8 13.7
Veterans benefits and services 5.7 6.9
All other programs 22.1 28.6
Allowances for pay increase and contingencies
Undistributed intragovernmental transactions -2.9 -4.6
Total 118.6 178.9
$81.0
(28.8)
33.3
5.3
6.5
.11.4
.9
2.4
$81.5
(25.4)
37.2
6.1
7.2
13.0
1.1
3.3
+$28. 0
(+25.4)
+14.4
+2.6
+5.6
+11.2
+1.1
+2.4
59.8
67.8
+37.4
15.2
7.7
25.0
.1
-5.1
16.0
7.7
24.9
3.2
-5.7
+6.1
+2.0
+2.8
-f-'3.2
2.8
183.7
195.3
+76.7
I Less than $50,000,000.
The priorities implicit in the 1970 budget can be sharpened by looking at the
trends in outlays over the 6-year period covering the years of the Johnson .Ad-
ministration budgets. Betweeoi 1964 and 1970, total outlays will have risen by
65%. However, within that total, major social programs show an increase of
123%, more than doubling since 1964. This is twice the rate of increase for any
other category of Government programs. Interest is up 63% in these years.
National defense outlays, including special Southeast Asia support, are up 52%.
Veterans benefits and services will have risen by 36% between 1964 and 1970.
All the other programs of the Government show a growth of about one-eighth in
this 6-year period, clearly reflecting, I believe, the policy of holding down on
programs of less urgency and reducing outlays to the extent feasible, while giving
highest priority to efforts to meet urgent domestic needs.
In these efforts, the Federal Government is increasingly relying on State and
local governments, through rising amounts of Federal financial aid. Grants to
State and local governments, are estimated to total $25 billion in 1970, compared
with $20.8 billion in the current fiscal year. Since 1964, grants have doubled in
amount and now make up more than one-fifth of total Federal spending for
civilian domestic programs. Federal-aid outlays now represent about 18% of
State and local revenues, compared with about 15% in 1964.
Of particular interest is the fact that within the total of Federal grants, there
has been a major shift to urban metropolitan areas, where almost two-thirds of
all Americans live. A considerable amount of direct Federal outlays goes into
these areas in the form of transfer payments to individuals, such as social security
benefits, or through construction projects, such as post offices. However, in addi-
PAGENO="0116"
112
tion, Federal grant programs have been increasingly focused on urban areas.
In 1964, an estimated $5.6 billion, or 55%, of total Federal grants to State and
local governments went to metropolitan areas. The 1970 budget provides $16.7
billion for aid to these areas, triple the amount in 1964, and representing about
67% of total Federal grants estimated for 1970.
Looking to the future, the President is recommending establishment of an
Urban Development Bank to provide substantial amounts of long-term financing
of public facilities in urban communities through the combined efforts of Fed-
eral, State, and local governments and private enterprise. This Bank would raise
funds primarily by issuing federally guaranteed bonds to the public and, in addi-
tion to financial aid, w-ould provide technical assistance to the Nation's urban
areas.
In conclusion, I believe that the 1970 budget represents an appropriate response
to the fiscal policy requirements for maintaining a healthy and vigorous economy
and provides for continuing the progress we have made in meeting both the
Nation's military needs and high priority domestic objectives.
Chairman PATMAN. Thank you very much, sir. Without objection,
we will continue the traditional policy that this committee has had a
long time of recognizing each member for 10 minutes to question our
witnesses until each member present has had an opportunity to inter-
rogate the witnesses.
Now, I will ask you gentlemen three questions here and I will ask
you to answer them when you go over your transcript of the record
of this proceeding. If that is satisfactory, we will save a little time
that wa.y.
We have very disturbing distortions in our economy. The excessive
level of interest, rates, the highest in our history, is threatening the
housing industry and the small businessman. It is always the weakest
who are hurt by tight money.
Do you not believe, as a. responsible public official, that we have to
do something about it and do it. quickly?
(The following reply was submitted by the Council of Economic
Advisers:)
CoUNcIL OF EcoNo~rIc ADVISERS RESPONSE To CHAIRMAN PATMAN
I would certainly agree that high interest rates and tight money create disturb-
ing economic distortions. As you suggest, these bear down inequitably on par-
ticular groups in our economy such as homebuilders and home buyers. The only
appropriate remedy and preventive strategy for countering these trends is
greater reliance on fiscal policy for economic restraint. Relieving the pressure on
financial markets w-as a key objective of the administration's tax proposals in
1967 and early 1968, and it is an important reason for extending the surcharge
this year. If fiscal policy does not provide the needed restraint, tight money may
become the only alternative to an inflationary boom which would be even more
dangerous and more inequitable.
Under present circumstances it w-ould be unrealistic to expect a rapid re-
versal and decline of interest rates. It will take clear and distinct evidence of an
economic slowdown to convince both borrowers and lenders that financial condi-
tions w-ill relax and to alter inflationary expectations which tend to raise interest
rates. A bipartisan consensus in the Congress on supporting extension of the sur-
charge would have favorable effects on financial markets. With the stabilization
program that w-e are proposing, the Federal Reserve should be able to reduce the
restraint from monetary policy gradually within 1969.
(The following reply was submitted by the Treasury:)
TREASURY DEPARTMENT RESPONSE TO CHAIRMAN PATMAX
Interest rates are extremely high by historical standards. In key areas, they
stand w-ell above the peaks reached at the time of the "credit crunch" in 1D66.
How-ever, while credit is expensive, it is much more generally available than
during the 1966 period of stringency. It is hoped that a satisfactory degree of
PAGENO="0117"
113
credit availability can be maintained and that there will be no repetition of the
1966 experience when home financing and construction, as well as other areas
of the economy, experienced a heavy burden of adjustment.
The shift to fiscal restraint embodied in the Revenue and Expenditure Control
Act of 1968 had as one of its important objectives the maintenance of adequate
flows of credit and the avoidance of undue reliance upon monetary tightening.
For the present, a degree of monetary and fiscal restraint is required in order
to achieve a necessary moderation of inflationary pressure. But, the fiscal meas-
ures now in place should gradually ease the existing pressures on credit markets
and allow monetary policy a needed degree of flexibility.
The improved Federal financial position resulting from the surcharge and ex-
penditure control will be an important factor easing the strains on private
credit markets. On the unified budget basis, there was a net Federal credit de-
mand-borrowing from the public-of $23.1 billion in fiscal year 1968. In fiscal
1969, there is to be a repayment of $3.1 billion, and in fiscal 1970 a repayment of
$4.0 billion. The Federal Government has shifted from being a net demander of
funds from private credit markets and has become a net supplier of funds. In
terms of immediate pressures on the markets, it is particularly signficant that
between mid-March and June 30 of this year the total public deht will be re-
duced about $8 billion. Since the trust funds will be acquiring some debt, the
paydown to private markets during this period will exceed $8 billion by a con-
siderable margin.
In addition to its very imfO~tant effect on the Federal finances, fiscal restraint
is expected to exert a substantial impact on the economy in early 1969. A fur-
ther moderate slowing in the overall pace of expansion should lead to some
scaling down of private credit demands. This would further reduce the degree
of pressure being placed on private credit markets.
(The following reply was submitted by the Bureau of the Budget:)
RESPONSE FROM BUDGET DIRECTOR ZwIcK TO MR. PATMAN'S QUESTION CONCERNING
INTEREST RATES
During the period of debate about the income tax surcharge, the Administra-
tion repeatedly called attention to the unfair burdens which rising interest rates
create for small businessmen, farmers, the housing industry, and State and local
governments, which depend heavily on the money markets for financing. A major
reason for requesting the surcharge was to reduce these burdens. And it is a
major reason for proposing, in the 1970 budget, that fiscal restraint be continued
through fiscal year 1970.
In the absence of a policy of fiscal restraint, monetary policy would have to
carry an undue share of the load of restraining the economy. We learned well in
1966 the consequences of relying too heavily on monetary policy-exceedingly
tight credit, soaring interest rates, and inequitable restrictions on those sectors
of the economy noted above. With fiscal restraint continuing through fiscal year
1970, a less restrictive monetary policy than is now necessary should be possible,
and the high interest rates we are now experiencing should recede as the supply
of funds becomes more plentiful relative to the demand for them.
A year ago, the Federal Government was a heavy borrower in the money mar-
kets and, thereby, a direct contributor to the upward push on interest rates. This
year, and in the year ahead, the Government will be essentially neutral, since
outlays in both years will be financed entirely from current revenues.
I would like each of you to comment on that as suggested.
Now, the Urban Development Bank mentioned by the Director of
the Budget, I think, is a very interesting proposal and Tam very much
impressed with it. That will give us an opportunity in considering
that proposal to consider whether or not we should have tax-exempt
bonds or whether or not the Federal Government should pay the por-
tion that the local communities would benefitS from by tax-exempt
bonds and get rid of them so it will help our entire economy and raise
the amount of taxes very much and help the cause of tax reduction-
if it is handled just exactly right and it could result in a much lower
scale, lower interest rates for housing loans.
PAGENO="0118"
114
(The following material was subsequently submitted by the Treas-
ury Department in response to Chairman Patman's suggestion:)
The enclosed copy of the draft Urban Development Bank Act of 1969 and the
letter transmitting the proposed bill to the Speaker of the House are provided
in further response to the question raised by Chairman Patman. Enclosed also
are excerpts from three addresses by Under Secretary Deming and an address by
Assistant Secretary Surrey bearing on the Urban Development Bank proposal.
As stated in the letter transmitting the Urban Development Bank proposal to
the Congress, the funds appropriated for payments to the Bank to reduce the
Bank's lending rate would not involve a net cost to the Federal budget. Added
tax revenues stemming from the fact that the Bank would issue taxable securi-
ties would offset the cost of the payments made to the Bank.
Also, as stated in the transmittal letter, the tax exempt market would continue
to be available to State and local governments as a source of financing after the
Urban Development Bank is established. Indeed, by tapping a broader segment
of the capital market for loan funds to finance the public facilities needs of State
and local governments, the Bank, by its operations, will reduce the growing pres-
sure on the tax exempt market, and therefore indirectly help those governmental
bodies which continue to utilize tax exempt securities to finance their capital
needs.
DEPARTMENT OF HOUsING AND URBAN DEvELOPMENT,
OFFICE OF THE SECRETARY,
January 17, 1969.
HON. JOHN W. MCCORMACK,
Speaker of the House of Representatives, TVashingtoa, D.C.
DEAR MR. SPEAKER: Enclosed are five copies of a proposed bill "To establish
an `Urban Development Bank' to assist in broadening the sources and decreasing
the cost of capital funds for State and local governments." Also enclosed are five
copies of a section-by-section summary of the bill.
This proposed legislation would implement recommendations made by the
President in the State of the Union and Budget messages. Enactment of the leg-
islation will help the Nation, through a partnership of Federal, State and local
governments, working with private enterprise, to move forward to meet the mas-
sive needs of our cities and their people.
It is now clear that we are undergoing a tremendous expansion in borrowing
by State and local governments for capital expenditures. It is estimated that in
the next ten years State and local governments may need to borrow over $200
billion to finance essential public facilities the communities of the Nation must
have to provide a suitable living environment for their citizens.
A consensus of concern has arisen over the capacity of the capital markets, as
now structured, to cope with the essential credit needs of State and local gov-
ernments. Even at present levels of borrowing, the municipal bond market is
strained from time to time and is not efficient and effective:
interest rates are inordinately high on State and municipal obligations;
maturities are unrealistically short for many development projects;
the range of investors is narrow, primarily commercial banks, and the
market is particularly inadequate in times of credit stringency;
the rating system denies many communities the financing they need for
essential facilities on reasonable terms; and
smaller communities whose issues are in small amounts or are not fa-
miliar to investors find no market.
These defects in the existing market can be expected to be magnified by many
times in future years as State and municipal government credit needs increase
and indeed may render the adequate financing of State and local public facilities
impossible. We believe it should be a prime national concern to assure the con-
tinued availability of private financing for State and local capital needs. This
proposed legislation is designed to expand the capital market available to States
and localities by providing an additional financial mechanism which will help
them to secure, on resonable terms, the financiiig they need to enable them to
construct essential public facilities. It would establish a federally chartered
bank-an Urban Development Bank-to finance the capital cost of State and
local government public works and community facilities.
The activities of the Bank would be directed by a 17-member Board of Direc-
tors, the Chairman of which would be the president of the Bank. This official
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would be appointed by the President of the United States by and with the advice
and consent of the Senate. The other 16 members of the Board of Directors
would consist of not more than three Federal officials or employees appointed by
the President of the United States; three representatives of local or State gov-
ernments appointed by the President of the United States; and ten directors
elected by three distinct groups of stockholders in the bank. Of these ten elected
directors, four would be elected by State stockholders, four by local governments,
and two by private corporations and individuals who subscribe to stock in the
Bank.
An initial Board of Directors, to serve at least one year, would be appointed
by the President of the United States, by and with the advice and consent of the
Senate. Members of this initial Board of Directors would represent Federa',
State, local and private interests
The Bank would secure funds necessary to finance its lending activities by
selling its obligations in the private capital markets. To help protect holders
of the Bank's obligations against possible losses of principal and interest and
to assure the Bank adequate access to the capital market at reasonable interest
rates, the Bank would also be authorized to borrow from the Treasury. This is
the highly successful approach initially used to insure investor confidence in the
Federal National Mortgage Association.
Interest on obligations sold by the Bank to finance its lending activities would
be fully taxable. To enable the Bank to lend to State and local governniental
bodies at favorable interest rates, however Federal payments would be made
to the Bank to cover the difference between the Bank's borrowing cost and the
amount of interest it receives on its loans.
The amount of those payments and the volume of Bank lending would be con-
trolled by the Congress. The funds appropriated for payments to the Bank to
reduce the Bank's lending rate, however, would not involve a net cost to the
Federal budget. Added tax revenues stemming from the fact that the Bank would
issue taxable securities would offset the cost of the pay~ents made to the Bank.
The tax exemept market would continue to be available to State and local gov-
ernments as a source of financing after the Urban Development Bank is estab-
lished. Indeed, by tapping a broader segment of the capital market for loan
funds to finance the public facilities needs of state and local governments, the
Bank, by its operations, will reduce the growing pressure on the tax exempt
market, and therefore indirectly help those governmental bodies which continue
to utilize tax exempt securities to finance their capital needs.
The Bank would serve as an instrument to advance the welfare of our Nation's
citizens while permitting each State and local government to pursue its develop-
mental policies in the manner it deems best suited to the needs of its citizens.
We believe this proposal exemplifies creative federalism at its best. The mecha-
nism it creates to meet a national problem enlists the financial support and par-
ticipation of all levels of government-Federal, State and local-as well as the
private sector in a joint enterpries to enable communities to provide needed
public facilities.
In summary, we believe creation of the Bank will further three broad
purposes-
First, and foremost, it will make possible a greater allocation of capital
to the development of needed public facilities.
Second, it will help to stimulate the construction of public facilities which
will contribute to economy, efficiency and the comprehensively planned de-
velopment of the area in which the facility is to be located.
Finally, it should help prevent disruption of the capital markets likely
to result from the efforts of State and local governments to borrow funds to
finance the large increase in public facilities expenditures which will take
place in the next decade.
The financial problems of our State and local communities are both urgent
and growing. The early establishment of an Urban Development Bank is both
feasible and desirable. We recommend early action by the Congress.
The Bureau of the Budget advised on January 16, 1969 that there is no objec~
tion to the submission of this draft legislation to the Congress and that its
enactment would be in accord with the program of the President.
Sincerely yours,
JosEPit W. BARR,
Secretary of the Treasury.
- ROBERT C. WOOD,
Secretary of Housing and Urban Development.
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A BILL To establish an Urban Development Bank to assist in broadening the sources
and decreasing the costs of capital funds for State and local governments, and for
other purposes
Be it enacted by the senate and Honse of Representatives of the United gtates
of America in Congress assembled, That this Act may be cited as the "Urban
Development Bank Act of 19~39."
FINDINGS AND DECLARATION OF PURPOSE
SEC. 2(a). The Congress hereby finds and declares that the sound and orderly
development of the Nation's communities, as well as the creation of new com-
munities and the expansion and enlargement of existing communities which
must take place to accommodate our growing population, requires the adequate
and timely provision of a wide variety of public works and community facilities,
such as streets, water, sewers, schools, hospitals, libraries, airports, facilities
for liquid and solid waste disposal, mass transit; recreation and other facilities
which serve community needs.
The Congress further finds that the sources of funds currently available to
State and local government to finance such public works and facilities are already
strained and that there will be an increasing demand for such funds as State
and local governments seek to meet their growing need for public works and
facilities.
The Congress further finds that to meet the anticipated financial needs of our
growing communities will require the full mobilization of the resources and
skills of all levels of government, State, local and Federal, as well as the private
sector in a coordinated and joint effort and that public investment in our Nation's
communities, when efficiently planned and carried out, will add to the wealth
of individual communities as well as of the Nation.
(b) It is the purpose of this Act to establish, with State and local govern-
ments and the private sector, an Urban Development Bank to make long-term
development loans and to provide technical assistance to State and local gov-
ernments and their agencies to help them meet needs f or essential public works
and community facilities, including the acquisition of land necessary thereto.
CREATION OF BANK
SEC. 3. There is hereby created a body corporate to be known as the Urban
Development Bank, which shall have succession until dissolved by Act of Con-
gres. The Bank, which shall not be an agency of the United States Govern-
ment, shall maintain such offices as may be necessary or appropriate in the con-
duct of its business.
EOARD OF DIRECTORS
SEC. 4(a). The Bank shall have a board of directors which shall consist of
seventeen persons, one of whom shall be the president of the Bank. The President
of the United States, by and with the advice and consent of the Senate, shall
appoint six directors, not more than three of whom shall be officers or employees
of the United States and three of w-hom shall be persons identified with or rep-
resentative of State or local government. Of the remaining members of the
board, four shall be elected by the class A stockholders, four shall be elected by
the class B stockholders, and two shall be elected by the class C stockholders.
If at the time of any election of directors the aggregate par value of outstand-
ing class C stock is less than $50 million, the President shall appoint one class
C director, who shall be identified with or representative of persons qualified to
subscribe for class C stock.
(b) Those directors ~ho are officers or employees of the United States shall
serve at the pleasure of the President and until their successors have been ap-
pointed and have qualified. Each such director may designate an alternate w-ho
shall be an officer or employee of the United States, to serve as director in his
absence. The remaining directors shall each be appointed or elected for a term
ending on the date of the next annual meeting of the common stockholders of
the Bank. Any appointive seat on the board which becomes vacant shall be filled
by appointment of the President. Any elective seat on the board w-hich becomes
vacant after the annual election of the directors shall be filled by the board,
but only for the unexpired portion of the term. Any director w-ho is a full-
time officer or employee of the United States shall not receive compensation
for his services as director.
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(c) The board of directors shall meet at the call of its chairman, who shall
require it to meet not less often than once each month.
(d) The President, by and with the advice and consent of the Senate, shall
appoint a president of the Bank, who shall serve at the pleasure of the President.
The president shall be chairman of the board of directors. Subject to the gen-
eral policies of the board, the management of the Bank shall be vested in the
president and he shall be the chief executive officer of the bank.
INITIAL BOARD OF DIRECTORS
SEC. 5. The initial members of the board of directors shall be appointed by
the President, by and with the advice and consent of the Senate, for an initial
term ending on the date of the first annual meeting of the common stockholders
of the Bank representing all classes of common stock, but not less than one
year. Members of the board appointed by the President for such terms shall be
representative of Federal, State, local, and private interests.
INITIAL EXPENSES
SEC. 6. In order to facilitate the formation of the Bank, the Secretary of
Housing and Urban Development is authorized to pay initial organizing and
operating expenses. There is authorized to be approp~ated~-a-sum--~toexceed~
$1,000,000, which sum shall be available for the purposes of this section for a
period of three years from the date of enactment of this Act.
FUNCTIONS
SEC. 7(a). The Bank is authorized, subject to the provisions of this section,
to make commitments to purchase and to purchase, service, or sell, on terms and
conditions determined by the Bank, any obligation or participation therein, of a
State or local government.
(b) Loans made by the Bank shall be in accordance with sound and prudent
development banking principles. No commitment shall be entered into, and no
purchase shall be made, unless the Bank determines that the proceeds of any
such purchase will be used by the borrower to finance capital expenditures for
public works and community facilities serving community needs.
(c) The Bank shall develop criteria to assure that projects assisted by it
are not inconsistent with comprehensive planning for the development of the
community in which the projects to be assisted will be located or disruptive of
Federal programs which authorize Federal assistance for the development of
like or similar categories of projects.
(d) Any loan made pursuant to this section may be in an amount not ex-
ceeding the total capital cost of the project to be financed with the loan; shall
be secured in such manner and be repaid in such period, not exceeding 40 years,
as may be determined by the Bank; and shall bear interest at a rate determined
by the Bank which shall not be less than two-thirds the current average yield
on outstanding obligations of the Bank as of the last day of the month pre-
ceding the date on which the loan is made.
COMMON SPOOK
SEC. 8(a). The Bank shall have common stock, having a par value of $1,000
per share, which shall be divided into three classes-
(1) Class A stock, which shall not be transferable, to be issued by the
Bank from time to time to each local government which is a member of
the bank to evidence any capital subscriptions made by such member as
required by subsection (e), and to be subscribed for in any amount by any
local government;
(2) Class B stock, which shall not be tranferable, to be issued by the
Bank from time to time to each State which is a member of the Bank to
evidence any capital subscriptions made by such member as required by
subsection (e), and to be subscribed for by the States in any amount but
not less than an amount for any State which bears the same proportion to
$100,000,000 as the population of that State bears to the population of all
States; and
(3) Class C stock to be subscribed for by any private individual, partner-
ship, corporation, foundation, society, association, or other organization,
profit or nonprofit, in an amount at any time of not less than 10 shares.
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(b) All classes of common stock shall be vested with all `voting rights, each
share being entitled to one vote with rights of cumulative voting at all elections
of directors, except that any class C stock held by a stockholder in excess of
1,000 shares shall be nonvoting.
(c) Class B stock, except stock issued in return for capital subscriptions
required by subsection (e), may be subscribed for upon payment of one-fifth
of the price, with the remainder payable in equal installments over the suc-
ceedling four years.
(d) All moneys received by the Bank in return for its common stock shall be
accumulated in a capital surplus account. All net earnings from the operations
of the Bank shall annually be transferred to its general surplus account. Such
dividends as may be declared shall be paid by the Bank to the holders of its
common stock and shall be charged against the general surplus account, but
in any one fiscal year dividends shall not exceed 6 per centum of the par value of
the common stock issued and outstanding and shall be payable out of the net
earnings of the Bank for that year.
(e) Each seller -of obligations to the Bank pursuant to section 7 shall be a
member of the Bank and shall be required to make payments of nonrefundable
capital subscriptions, equal to not more than 2 per centum nor less than 1 per
centum of the principal amounts of obligations purchased or to be purchased by
the Bank from such seller. In addition, the Bank may impose charges or fees for
its services with the objective that all costs and expenses of its operations should
be within its income derived from- such operations.
OBLIGATIONS OF THE BANK
SEC. 9(a). The Bank is authorized, with the approval of the Secretary of the
Treasury, to issue and have outstanding obligations having such maturities
and bearing such rate or rates of interest as may be determined by the Bank.
Such obligations may be redeemable at the option of the Bank before maturity
in such manner as may be stipulated therein. The aggregate amount of obliga-
tions of the Bank outstanding at any one time shall not exceed $2,000,000,000.
which amount shall be increased by $5000000000 on July 1, 1970, and by $5.-
000,000,000 on July 1 of each of the three succeeding years. The Bank shall
insert appropriate language in all of its obligations issued under this subsec-
tion clearly indicating that such obligations, together with the interest thereon,
are not guaranteed by the United States and do no constitute a debt or obliga-
tion of the United States or of any agency or instriunentality thereof other than
the Bank. The Bank is authorized to purchase in the open market any of its out-
standing obligations.
(b) In addition to the obligations of the Bank authorized to be outstanding in
subsection (a) of this section, the Bank is authorized to issue obligations to the
Secretary of the Treasury. The Secretary of the Treasury is authorized to
purchase any such obligations in order to insure the financial integrity of the
operations of the Bank, and for such purpose the Secretary of the Treasury
is authorized to use as a public debt transaction the proceeds of the sale of any
securities hereafter issued under the Second Liberty Bond Act, as now or
hereafter in force, and the purposes for which securities may be issued under the
Second Liberty Bond Act as now or hereafter in force, are extended to include
such purchases. Each purchase of obligations by the Secretary of the Treasury
under this subsection shall be upon such terms and conditions as to yield a return
at a rate not less than a rate determined by the Secretary of the Treasury. taking
into consideration the current average yield on outstanding marketable obliga-
tions of the United States of comparable maturities. The Secretary of the
Treasury may sell, upon such terms and conditions and at such price or prices as
he shall determine, any of the obligations acquired by him under this subsection.
All redemptions, purchases, and sales by the Secretary of the Treasury of such
obligations under this subsection shall be treated as public debt transactions of
the United States.
FEDERAL PAYMENTS TO THE BANK
SEc. 10(a). With respect to such amounts of loans of the Bank as may be speci-
fied in Appropriation Acts, the Secretary of Housing and Urban Development
is authorized to make, and to contract to make, annual payments to the Bank
in such amounts as are necessary to equal the amount by w-hich the dollar
amount of interest paid by the Bank on account of its obligations exceeds the -
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dollar amount of interest received by the Bank on account of loans made by it
pursuant to section 7 of this Act.
(b) There are hereby authorized to be appropriated to the Secretary of Hous-
ing and Urban Development such sums as may be necessary to carry out the
provisions of the Act, including such sums as may be necessary to make the
annual payments required by contracts entered into by the Secretary pursuant
to subsection (a) of this section.
GENERAL POWERS
SEC. 11. The Bank shall have pOwer:
(a) To sue and be sued, complain and defend, in its corporate name and
through its own counsel.
(b) To adopt, alter, and use the corporate seal, which shall be judicially
noticed.
(c) To adopt, amend, and repeal by its board of directors bylaws, rules, and
regulations as may be necessary for the conduct of its business.
(d) To conduct its business, carry on its operations, and have offices and
exercise the powers granted by this Act in any State without regard to any
qualification or similar statute in any State.
(e) To lease, purchase, or otherwise acquire, own, hold, improve, use or
otherwise deal in and with any property, real, personal or mixed, or.any interest
therein, wherever situated.
(f) To accept gifts or donations of services, or of property, real, personal or
mixed, tangible or intangible, in aid of any of the purposes of the Bank.
(g) To sell, convey, mortgage, pledge, lease, exchange and otherwise dispose
of its property and assets.
(h) To appoint such officers, attorneys, employees and agents as may be
required, to determine their qualifications, to define their duties, to fix their
salaries, require bonds for them and fix the penalty thereof.
(i) To enter into contracts, to execute instruments, to incur liabilities, and to
do all things as are necessary or incidental to the proper management of its
affairs and the proper conduct of its business.
TECHNICAL ASSISTANCE
SEC. 12. (a) The Bank is authorized to provide technical assistance to State
and local governments in the preparation and implementation of comprehensive
development projects and programs, including the evaluation of priorities and
the formulation of specefic project proposals. The Bank may charge appropriate
fees for its services under this subsection.
(b) The Bank is also authorized to undertake research and information
gathering, and to facilitate the exchange of advanced concepts and techniques
relating to municipal growth and development among State and local governments.
AUDIT OF FINANCIAL TRANSACTIONS
SEC. 13. The financial transactions of the Bank shall be audited by the General
Accounting Office in accordance with the principles and procedures applicable
to commercial corporate transaction's and under such rules and regulations as may
be prescribed by the Comptroller General of the United States. The `audit shall `be
conducted at the place or places where the accounts are normally kept. The
representatives of the General Accounting Office shall have access to all books,
accounts, financial records, reports, files, and all other papers, things, or property
belonging to or in use by the Bank and necessary to facilitate the audit, and they
shall be afforded full facilities for verifying transactions with the balances or
securities held by depositaries, fiscal agents, and custodians.
The expenses of any audit performed under this section shall be borne out of
appropriations to the General Accounting Office, and appropriations in such
sums as may be necessary are authorized. The Bank shall reimburse the General
Accounting Office for the full cost of such audit as billed therefor by the
Comptroller General, and the General Accounting Office shall deposit the sums
so reimbursed into the Treasury as miscellaneous receipts.
AUDIT REPORT TO CONGRESS
SEC. 14. A report of each such audit for a fiscal year shall be made by the
Comptroller General to the President and to the Congress and not later than six
months following the close of such fiscal year. The report shall set forth the
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scope of the audit and shall include a statement (showing intercorporate rela-
tions) of assets and liabilities, capital and surplus or deficit; a statement of
surplus or deficit analysis; a statement of income and expense; a statement of
sources and application of funds; and such comments and information as may
be deemed necessary to keep Congress informed of the operations and financial
condition of the Bank, to gether with such recommendations with respect thereto
as the Comptroller General may deem advisable, including a report of any
impairment of capital or lack of sufficent capital noted in the audit. A copy
of each report shall be furnished to the Secretary of Housing and Urban Develop-
ment, the Secretary of the Treasury, and to the Bank.
TAX EXEMPTION
SEc. 15. The Bank, its property, its franchise, capital, reserves, surplus,
security holdings, and other funds, and its income shall be exempt from all
taxation now or hereafter imposed by the United States or by any State or local
taxing authority; except that (1) any real property and any tangible personal
property of the Bank shall be subject to Federal, State, and local taxation to
the same extent according to its value as other such property is taxed and (2) any
and all obligations issued by the Bank shall be subjected both as to principal
and interest to Federal, State. and local taxation to the same extent as the
obligations of private corporations are taxed.
OBLIGATIONS A5 LAWFUL INvEsTMENTs, ACCEPTANCE AS SECURITY
SEC. 16. All obligations issued by the Bank shall be lawful investments, and
may be accepted as security for all fiduciary, trust, and public funds. the invest-
ment or deposit of which shall be under authority or control of the United States
or of any officer or officers thereof. All stock and obligations issued by the
Bank pursuant to this Act shall be deemed to be exempt securities within the
meaning of laws administered by the Securities and Exchange Commission, to
the same extent as securities which are direct obligations of or obligations guar-
anteed as to principal or interest by the United States.
PREPARATION OF OBLIGATIONS
SEc. 17. In order to furnish obligations for delivery by the Bank, the Secre-
tary of the Treasury is authorized to prepare such obligations in such form as
the board of directors may approve, such obligations when prepared to be held
in the Treasury subject to delivery upon order by the Bank. The engraved
plates, dies, bed pieces, and so forth, executed in connection therewith shall
remain in the custody of the Secretary of the Treasury. The Bank shall reim-
burse the Secretary of the Treasury for any expenditures made in the prepara-
tion, custody, and delivery of such obligations.
UNITED STATES NOT LIABLE
SEC. 18. The United States shall not be liable for any debts, defaults, acts, or
omissions of the Bank.
ANNUAL REPORT
SEC. 19. The Bank shall, as soon as practicable after the end of each fiscal
year, transmit to the President and the Congress an annual report of its opera-
tions and activities.
AMENDMENTS RELATING TO FINANCIAL INSTITUTIONS
SEC. 20. (a) The sixth sentence of the seventh paragraph of section 5136 of
the Revised Statutes, as amended (12 U.S.C. 24), is amended by inserting "or
obligations of the Urban Development Bank," immediately after "or obligations,
participations, or other instruments of or issued by the Federal National Mort-
gage Association or the Government National Mortgage Association,".
(b) Section 5200 of the Revised Statutes, as amended (12 U.S.C. 84). is
amended by adding at the end thereof the following new- paragraph: "(14)
Obligations of the Urban Development Bank shall not be subject to any limitation
based upon such capital and surplus."
(c) The first paragraph of section 5(c) of the Home Owners' Loan Act of
1933, as amended (12 U.S.C. 1464(c)), is amended by inserting `or in obligations
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of the Urban Development Bank ;" in the second proviso immediately after
"any political subdivision thereof ;"
(d) Paragraph (2) of section 14(b) of the Federal Reserve Act, as amended
(12 U.S.C. 355) is further amended by inserting "or any obligation of the Urban
Development Bank" immediately before the period at the end thereof.
DEFINITIONS
SEC. 21. As used in this Act-
(a) The term "Bank" means the Urban Development Bank created by section
3 of this Act.
(b) The term "State" means the States of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American
Samoa, and the Trust Territory of the Pacific Islands, or any agency or instru-
mentality of a State.
(c) The term "local government" means any county, municipality, or other
political subdivision of a State, or agency or instrumentality thereof, or any
school or other special district created by or pursuant to State law.
(d) The term "member of the Bank" means and State or local government
which has sold its obligations to the Urban Development Bank pursuant to
section 7 of this Act.
(e) The term "obligation" means any bond, note, debenture, or other instru-
ment evidencing debt.
SEPARABILITY
SEC. 22. If any provision of this Act or the application thereof to any person
or circumstance, is held invalid, the validity of the remainder of the Act, and
the application of such provisions to other persons or circumstances, shall not
be affected.
AUTHORIZATION FOR APPROPRIATIONS
SEC. 23. There are authorized to be appropriated, without fiscal year limitation,
such sums as may be necessary to carry out the purposes of this Act.
SECTION-BY-SECTION SUMMARY OF THE URBAN DEVELOPMENT
BANK ACT OF 1969
Section 1: This section provides for the Act to be cited as the "Urban Develop-
ment Bank Act of 1909."
Section 2. Findings and declaration of purpose-This section states the findings
that the sound and orderly development of our Nation's communities requires
the timely provision of a wide variety of public works and community facilities
and that the present source of capital funds to finance these projects is inade-
quate, and states the purpose of the Act to establish an Urban Development
Bank to make long-term development lOans at reasonable interest rates and to
provide technical assistance to State and local governments to help them meet
needs for public works and community facilities.
Section 3. Creation of Banks-This section would establish the Urban Develop-
ment Bank as a non-Federal corporation and would authorize the Bank to
establish regional or metropolitan offices.
Section 4. Board of Directors.-This section would provide for a 17-member
board of directors to consist of the president of the Bank, not more than three
Federal officials or employees appoointed by the President, three members ap-
pointed by the President representative of State or local government, four mem-
bers elected by local governments holding class A stock of the Bank, four members
elected by the States holding class B stock, and two members elected by private
persons or organizations holding class C stock. Olass C stockholders Would elect
only one director if their aggregate holdings were less than $50 million, the
President to appoint the remaining director. The term of non-Federal members
would be one year, and members who were Federal officials would serve at the
pleasure of the President. The board w-ould meet at least monthly and would
determine general policies of the Bank. The president of the Bank would be
appointed by the President and would be chairman of the board of directors.
Section 5. Initial Board of Direeors.-This section .would authorize the Presi-
dent to appoint all directors for an initial term until all classes of common stock
were represented, but not less than one year. The President's appointments would
be representative of Federal, State, local, and private interests.
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Section 6. Initial e~rpenses.-This section would authorize an appropriation not
exceeding $1 million, to remain available for three years, for the Secretary of
Housing and Urban Development to pay initial organizing and operating ex-
penses of the Bank.
Section 7. F'unction~s.-This section would authorize the Bank to make loans,
or participations in loans, to a State or local government to finance capital ex-
penditures for public works and community facilities. Loans could not exceed
the capital cost of the project, have a maturity exceeding 40 years, or an interest
rate less than two-thirds the current average yield on the Bank's outstanding
obligations. Projects financed by the Bank would not be inconsistent with com-
prehensive planning for the community, or disruptive of Federal programs assist-
ing similar or like projects.
Section 8. Common stock-This section would provide for three classes of
common stock, class A to be issued to local governments; class B to be sub-
scribed for the States; and class C to be subscribed for by private individuals and
organizations, in a minimum of $10,000. Each share of stock would be entitled to
one vote, except that any class 0 stock held by one person in excess of $1,000,000
would be non-voting. Borrowers from the Bank would be required to make non-
refundable capital subscriptions in amounts of not less than 1 nor more than 2
percent of the amount of the loan. The Bank would be authorized to impose fees
for its serices to meet costs and expenses. Dividends declared by the Bank, limited
to six percent annually, could be paid to the stockholders out of any net earnings.
Section 9. Obligations of the Bank-This section would authorize the Bank
to raise funds through the issuance of bonds or other debt instruments. The
Bank's issues would be required to receive the prior approval of the Secretary
of the Treasury. Obligations issued by the Bank would state that they are not
guaranteed by the United States and do not constitute an obligation of the United
States. The aggregate amount of outstanding obligalons would be limited to $2
billion, which amount would be increased by $5 billion on July 1, 1970, and by
$5 billion on July 1 of each of three succeeding years. In addition to these obliga-
tions, the Bank could issue other obligations which the Secretary of the Treas-
ury would be authorized to purchase in order to insure the financial integrity
of the operations of the Bank.
Section 10. Federal payment to the Bank.-This section would authorize the
Secretary of Housing and Urban Development to make, and to contract to make.
annual payments to the Bank in amounts necessary to equal the amount by which
the dollar amount of interest paid by the Bank on its obligations exceeds the
dollar amount of interest received by the Bank on loans made by it. For this
purpose, the amount of loans that could be made by the Bank would be approved
in Appropriation Acts.
Section 11. General powers.-The section would provide the Bank with gen-
eral corporate powers.
Section 12. Technical assistance-This section would authorize the Bank
to render technical assistance to State and local governments in the prepara-
tion and implementation of projects, and to gather and facilitate the interchange
of advanced concepts relating to municipal development.
Section 13. .4ndit of financial transactions-This section would require the
financial transactions of the Bank to be audited by the General Accounting Office.
The Bank w-ould reimburse the Government for the cost of any audit.
Section 14. Andit report to Congress-This section would require a report of
each audit to be made by the Comptroller General to the President and the
Congress, with copies of each report to the Secretary of Housing and Urban
Development, the Secretary of the Treasury, and the Bank.
Section 15. Ta~ cweinptioe.-This section would generally exempt the Bank
and its income from all taxes. However, any real and personal property of the
Bank w-ould be subject to taxation and all obligations issued by the Bank would
be subject both as to principal and interest to Federal, State, and local taxation
to the same extent as obligations of private corporations.
Section. 16. Obligations as lawful investments, acceptance as security.-This
section would make obligations issued by the Bank lawful investments and
acceptable as security for all fiduciary, trust, and public funds, and its stock
exempt from SEC requirements.
Section 17. Preparation of obligations-This section would authorize the
Secretary of the Treasury to prepare, hold, and deliver obligations for the Bank
on a reimbursable basis.
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Section 18. United States not liable.-This section provides that the United
States shall not be liable for any debts, defaults, acts, or omissions of the Bank.
Section 19. Annual report.-This section would require the Bank to transmit to
the President and Congress an annual report of its operations and `activities.
Section 20. Amendments relating to financial institutions.-This section would
permit Federal Reserve banks, national banks, and Federal savings and loan
associations to invest in or deal in obligations of the Bank.
Section 21. DefInitions. This section would provide definitions.
Section 22. Separability-This section would make the provisions and validity
of the Act separable if any provision is held invalid.
Section 23. Authorization for appropriations.-This section would authorize
appropriations necessary to carry `out the purposes of the Act.
EXCERPT FROM REMARKS BY lox. FREDERICK L. DEMING, UNDER SECRETARY OF
THE TREASURY FOR MONETARY AFFAIRS AT THE NATIONAL CONVENTION OF THE
BANK ADMINISTRATION INSTITUTE, ATLANTA, GA.
THE SHORT AND LONG OF IT
* * * * * * *
Financing pvblic reqnireinents over the longer term
The preceding discussion clearly suggests that, over the near-term future, the
pressure on the securities market exerted by the public section should, in the
aggregate, diminish very markedly. The technical task of' financing these re-
quirements, moreover, should not present undue difficulties.
When we look ahead to the longer term, however-for the next ten years or
beyond-the picture is different. For here, the financing requirements that can
be envisaged are truly formidable, and there is a pressing need for finding more
imaginative and efficient means of mobilizing the needed capital.
The area that presents the greatest challenge relates to the financing of what
1 call the infrastructure for social welfare. In this area, needs have risen with
dramatic force in the recent past-and promise to advance even more sharply
in the years ahead. I include in this category urban redevelopment and renova-
tion of ghettos, enlargement of public housing, restructuring of public transporta-
tion facilities, combatting air and water pollution, and enlarged and improved
education and health facilities.
Some of these tasks involve continuation of past activities. Others are
essentially new in character. But, in the total, the magnitude of the financing
requirements will be massive. It may almost be said that the change in quantity
is prospectively so great as to make the financing problem a change in kind, as
well as in amount.
Some of the activities I have cited may be undertaken and financed entirely by
State and local governments. Some others may be wholly within the sphere of
Federal responsibility. But, for the most part, these activities will require some
form of Federal assistance to, and Federal partnership with, the State and local
governments.
What is needed now-and is, indeed, beginning to take place-is a searching
and comprehensive look as to how this partnership can be developed in the most
effective and satisfactory fashion. It will require a proper balance between
orderly over-all direction and financial discipline and ample scope for local
independence and flexibility. It will call for broad decisions 011 the absolute
and relative amounts of the new needs to be financed directly from taxation and
the extent to which they can be met initially by borrowing. Where taxation is
involved, an optimum sharing of the burden between the Federal Government
and States and localities is required. In the case of borrowing, questions arise
as to the optimum mix between direct Federal borrowing, traditional State and
local debt financing, and resort to other, and partly new, types of borrowing
arrangements.
In all cases, there is a need to search for the most efficient, economical, and
equitable means of financing-means that will optimize the benefits and minimize
the overall costs to the taxpayer, means to permit the raising of funds in the
capital markets at the low-est cost feasible, and. means that can be flexibly
adapted to changing needs. And,' in my judgment, it is important that the
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financing procedure be clear and visible, so that intelligent choices among
alternative methods can be macic and subsidy elements can be clearly identified.
Let me concentrate here on those spending needs that are likely to be financed,
at least in the first instance, largely through the issuance of debt, rather than
by tax funds. Clearly, a major share of the emerging needs will have to be
financed in this way. That does not mean, of course, that the Federal share can
be met without a significant contribution from the tax side. This tax-financed
contribution may come about in the form of debt service grants, involving pay-
ments of interest or of capital-or both- on locally issued debt: it may entail
outright tax-financed Federal subsidies granted for projects that also require
large public borrowing; it may result simply because States and localities can
issue tax-exempt securities.
How large are the capital needs of the types considered here that are likely
to arise over the next few years? How can they best be financed? And what
impact is such financing likely to exert on capital markets generally?
The magnitude of the task
In 1947, net State and local debt was less than $15 billion. By 1957, it had
grown to $47 billion; and, last year, it stood at $113 billion. A mere continuance
of this growth trend would raise the level of outstanding State and local debt
ten years from now m~v about 8120 billion-to a level of 8240 billion.
But this is only part of the story. On top of the normal growth projected, it
appears that there will be a very substantial increase in State and local debt
as a result of new and expanded programs involving Federal financial assistance.
Estimates of the likely magnitude of this increase vary widely, not only because
the costs of different programs to solve our urgent social and environmental
problems are often very difficult to project, but also because of different assess-
ments as to how fully the States and localities will actually seek to meet these
problems.
Let me just cite one type of calculation that illustrates this point In 1968,
the Congress enacted, or came close to enacting, provision for Federal capital
assistance in the form of debt service grants for a series of new or greatly
expanded State and local programs. It is useful to look at the Congressional
authorizing legislation for such assistance and then to calculate what it implies
for the growth of State and local debt financing.
For example, Congress authorized additional debt service grants for public
housing of $150 million a year for the next two years. This will make possible
a total of about $3 billion a year in additional local debt financing for this
purpose. If one assumes that additional Congressional authorizations will be
maintained at the same level over the next decade, the total added debt from
this program alone would come to $30 billion. I am not including projected
Federal assistance to low income housing under this heading-this w-ould be a
much larger sum, since it would encompass private as well as public housing
Using similar calculations for three other program areas on w-hich Congress
completed action in 1968, one finds a potential net increase in State and local
debt over the next decade of about $20 billion for college housing, academic
facilities, and the vocational education program, although some of this will
presumably be for private nonprofit institutions.
The debt service grant approach was also authorized for the anti-water
pollution program in legislation which passed both the House and the Senate
this year, though it did not survive the adjournment rush. Assuming a continua-
tion of the annual level of new dollar authorizations in the enabling legislation,
the potential increase in State and local debt for these purposes over the next
decade is $40 billion.
In addition, the Senate passed a bill in 1968 which authorized debt service
grants on obligations issued by State and local bodies, as w-ell as nonprofit
institutions, for hospital modernization. The needs in this area have been
estimated at over $10 billion.
Thus, assuming that the Congress follows through on the debt service grant
approach in just these six program areas, the potential increase in State and
local debt over the next decade is about $100 billion.
To this amount, one would need to add new financing requirements for mass
transit, other urban redevelopment activities, municipal airports, anti-air pol-
lution efforts, and other areas in w-hich Federal programs have been estab-
lished and are expected to be increased. Taking all this into account, it is not
at all difficult to visualize a total rise in State and local debt over the next ten
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years of $150 billion or more, in addition to the "normal" growth of $120 billion
cited earlier. That would mean that, in ten years, State and local debt would
be rising by $30 to $35 billion or more a year, rather than by $10 billion, or
less, as at present.
To some extent, the new programs cited may substitute for what I have
counted as "normal" growth. But this overlap may no be large; the new pro-
grams cited will deal essentially with new types of needs. Also, the annual new
dollar authorizations which Congress has now provided for the next few years
may not be continued at the same level for a decade. Given the pressure of
underlying needs, however, it seems at least as likely that, on the balance, we will
see increases rather than reductions in Congressional authorizations as the
decade progresses.
* In citing these potentially very large figures, it has not been my purpose to
suggest that the indicated requirements cannot be financed through debt issues.
My hunch is, in fact, that, in a strongly growing economy and with continued
progress in tapping new sources of savings, the task will, in the end, prove
manageable. If the economy expands at a rate in real terms of 4 to 41/2 percent
over the next decade-which is quite practicable under intelligent economic
policies in both public and private sectors working together-we would have a
GNP in 1978 of some $1.3 trillion, which would generate a lot more tax revenues.
and a lot more savings. But there can be no doubt that, even so~ the task will
be more manageable only if we have major improvements in methods of
mobilizing capital
The need for new ~1nancing approaches
In calling for such improvements, I assume that the traditional means of
iinancing State and local government needs will have a continued role, par-
ticularly in the financing of tasks that have customarily been entirely in the
province of such governments. But I do not think that these means alone will
be adequate to cope with the huge additional demands generated by new types
of programs or that they can fully satisfy the criteria of maximum efficiency
and economy.
As I have indicated previously, by far the most promising approach for
mobilizing the needed new capital in a more efficient manner would seem to lie
in the establishment of a new central financing institution for domestic de-
velopment-such as a National Urban Development Bank.
Many different proposals for such a central development financing institu-
tion have recently been offered, and the need is to reach agreement on the more
precise characteristics of such an institution.
As I see it, the new institution would issue its own securities, backed by
Federal guarantee, and relend the proceeds to program agencies-either to
Federal lending agencies or directly to State and local bodies, depending on
Congressional decisions as to individual program structure and control. Aside
from the Federal guarantee, which would help marketing and minimize in-
terest costs, a Federal contribution, to the extent necessary and desirable, could
come from clearly identified interest rate subsidies given borrowers from the
institution and providhd by direct Congressional appropriations.
The advantages of the new approach would be manifold.
First, the new institution could develop one efficient marketing instrument-
or family of instruments-with broad appeal to various investor classes. It could
thus tap a much wider market than the many instruments now being issued by
a great variety of Federal agencies and State and local agencies receiving
Federal assistance. The market for such instruments would also be likely to
attain much greater depth than alternative financing means for urban de-
velopment purposes. Thus, secondary markets should develop which would allow
ready "shiftability" of the securities among investors. In speaking of "one"
efficient marketing instrument, I do not necessarily mean that the institution
would issue only a single type of instrument. It could offer a number of closely
related types of securities, but tailored in ways that broaden the range of
reachable investors, similar to the spectrum of offerings now used in Federal
debt management, itself. But these instruments should be carefully designed
to fit into a coherent whole. Probably variations in types should be relatively
few for some time; and their relation to the Treasury's debt, itself, would have
to be carefully considered.
24-833 0-69-pt. l-9
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Second, in contrast to the present fragmentation of financing effi)rts, the new
institution would automatically provide for coordination of issues and control
over programs requiring finance. Thus, a central financing institution would
*have the greatest flexibility in going to market at the best time and with the
volume, maturities, `and other terms and conditions which would enable it to
`borrow at a significantly lower interest rate than could be obtained by several
smaller, special purpose institutions, each with its Own special problems of
timing, seasonal factors, and other program considerations.
I do not think, incidentally, that the answer to the financing problems over
the next decade will be to establish a separate new institution for each problem
area, such as an education bank, a pollution control bank, a transportation banl~,
etc. The difficulty with this approach-in addition to the duplication of effort
and the problem of finding that much financing talent-is the proliferation of
financing instruments which would develop and the problem of coordinating
these issues in the market. Of course, even `a central financing institution could
decentralize its lending activities, either in terms of loan purpose or geographic
region. But I think there is *a persuasive case for a centralized approach to
mobilizing capital funds.
Third, the new approach permits the most economical financing of the growing
new needs, looked at either from the viewpoint of the Federal Government or
from the viewpoint of State and local governments.
If all of these new needs were to be financed in the tax-exempt municipal bond
market, which, by its very nature, is limited in capacity, the `additional volume
of financing would tend to have the effect of significantiy increasing State and
municipal borrowing costs, not only for these new programs but across-the-board
for all State and municipal government programs. The proposed new institution
would avoid these problems by operating in a far broader market. The net cost
to the Federal budget, moreover, would be minimized through the use of the pro-
posed development bank, which would issue taxable securities.
These considerations give the Federal Government and State and local govern-
ments a community of interest in finding the financing means that will be most
economical for all levels of government combined. And I am confident that
means can be found which will not impinge in any way on the ultimate fiscal
independence of State and local governments, which now rely mainly on the tax-
exempt concept.
some implications for capital markets
Even if the burgeoning new needs that we now envisage are financed in a
much more efficient fashion than is now the case, such financing will be bound to
have a major impact on capital and securities markets generally. Added to
continuing large private requirements-and notably the likelihood that new
housing needs will exert much greater pressures on the general capital markets
than in the past-it will almost certainly mean that the average level of long-
term interest rates will be higher than in the 1950's `and early l9~0's, when
they were quite low.
This is not to imply that rates will not come down from their very high
recent levels. But, it does raise questions as to how long we can afford to con-
tinue accepting attitudes and practices that were essentially developed in periods
when `average interest rates were substantially below the levels indicated for
`the future. It suggests that continued maintenance of the statutory 4~4 percent
ceiling on long-term Government bonds could become an increasingly trouble-
some obstacle to sound Federal debt management.
OO~OLUDING COMMENT
So there you have the short and long of it. For the short-run, the pressure
of Federal finance demand will diminish sharply, with consequently less pres-
sure on interest rates. Over *the longer run, the needs for social welfare in-
frastructure will place very heavy demands on the capital markets.
I welcome the lessened short-run pressure and wish my successors well in
meeting the hard financial problems of the future.
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EXCERPT Fno~r REMARKS BY HON. FREDERICK L. DEMING, UNDER SECRETARY OF
THE PREASURY FOR MONETARY AFFAIRS, AT THE 50TH ANNIVERSARY CONVENTION
OF THE AMERICAN GAS ASSOCIATION, PHILADELPHIA, PA., OCTOBER 7, 1968
* * * * * * *
FINANCIAL PROBLEMS OF THE FUTURE
During the next ten years, two major problem areas of finance will challenge
the best efforts of the United States and one, perhaps both of them, will require
concentrated attention by other advanced countries of the world.
For the United States, the first problem-bigger by far than the second in
terms of financial requirements_is to find ways to provide capital finance for
public purposes designed to strengthen and improve what might be called
social welfare infrastructure. By this term, I mean urban redevelopment, the
renovation of the ghettos, the provision of public housing, the enlargement of
public education and health facilities, the restructuring of transportation fa-
cilities, the provision of clean water and air.
In one sense, the problem is not a new one; in a more realistic sense, it is a
brandnew one by virtue of its recognition and by virtue of the very size of its
financial requirements. Let me give you some indication of its size.
Net State and local debt in 1947 was less than $15 billion. Last year, it was
$113 billion-almost $100 billion larger than 20 years earlier. Mere continuance
of that trend would make it $240 billion ten years from now. Add in the new
programs noted above, and it is not difficult to visualize another $150 billion
requirement. It is clear that requirements of this order of magnitude will demand
the most efficient, imaginative, and sound means of mobilizing capital that we
can devise.
I have spoken elsewhere of one approach to this problem-a National Urban
Development Bank. Other suggestions have been made-for a Municipal Bond
Guarantee Corporation; for a Community Development Bank; for a Domestic
Development Bank. Each is aimed at the basic objective of providing an efficient
means of mobilizing the Nation's capital resources. We shall need to come to a
consensus on a particular approach.
That approach should embody two basic principles:
Development of one efficient marketing instrument with broad investment
appeal.
Coordination of issues and control over programs requiring finance.
A development institution would issue its own securities, backed by Federal
guarantee, and relend the proceeds to program agencies-either Federal lending
acencies or directly to State and local agencies, depending on Congressional
decisions as to individual program structure arri control. Aside from the Federal
guarantee, which would help marketing and minimize interest costs, a Federal
Government contribution, to the extent necessary and desirable, could come
from interest rate subsidies__clearly identified-provided by direct Congressional
appropriations.
The second problem, which will affect both the United States and other
advanced countries, is to find ways to provide increased developmental capital
finance for the less-developed countries of the world-both for infrastructure
and for expansion of the agricultural and industrial base.
The financial requirements for the United States, or for any other country,
are significantly less than those for domestic social welfare infrastructure, but
there are other problems-perhaps most notably the balance of payments
problem. Methods must be devised to fit these financing needs into the balance
of payments adjustment process so that, when a country is in surplus, it can
export more capital to developing countries, and when in deficit, it can export
less. At the same time, it is desirable to increase the total amount of capital
export and assure that volume for a period of time.
The United States proposed an approach of this type in the current replenish-
ment of funds for the International Development Association. The Organization
for Economic Cooperation and Development, composed of some twenty countries,
suggested, in a 1966 report on the adjustment process, that surplus countries
open their capital markets more freely to borrowings by international financial
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institutions, such as the World Bank or the regional development banks. Both
of these approaches need further development and implementation through
international agreement. Both will lead to more multilateralization of develop-
ment finance, which should be more efficient, both in terms of raising the capital
and in terms of channeling it where it can do the most good.
Finally, I should note two points. Both of these financial problems-domestic
* social welfare infrastructure and development finance-can be resolved only
within a* framework of a strongly expanding domestic and world economy. That
is an absolute requirement to generate the savings and the tax revenues for
the needed finance. And growing economies, themselves, need the thrust of
dynamic new investment, which, itself, requires high savings.
REMARKS BY Hox. STANLEY S. SURREY, ASSISTANT SECRETARY OF THE TREASURY,
BEFORE THE FIFIH Mi ICIPAL CONFERENCE, INVESTMENT BANKERS AssoCIATION,
NEW ORLEANS, LA., SEPTEMBER 27, 1908
THE FINANCING OF NEW SOCIAL PROGRAMS-AND TAX EXEMPTION
The Investment Bankers Association is to be congratulated on staging this
forum on "The Federal Government's Role in State and Local Financing-
Taxable or Tax Exempt?" The topic is one of direct and important concern to
many-~the Federal Government, State and Local Governments, those who invest
in securities, and those like yourselves who participate in the marketing of
securities. Unfortunately, most discussions which involve the sensitive subject
of Federal-State relationships and the super-sensitive aspect of that relationship-
tax exemption for State and local securities-proceed w-ith a maximum of
emotion, accusation and platitudes and a minimum of hard, objective analysis.
Your desire for a forum with just the opposite approach is commendable and I
trust my remarks will be seen as in keeping with your desire-for they certainly
are so intended.
At present there are about ~120 billion of outstanding State and local tax-
exempt obligations and about $15 billion in new obligations are being issued
annually (for a $9 or $10 billion net annual growth). I am not discussing these
obligations or the merits of their tax exemption. I am not here to turn back any
clocks or reverse history. I am here to consider what will happen if the clocks
Suddenly start to race madly forward.
My remarks relate to the enormous increase in new issues of these obligations
that now looms up before us and the effects of adding this new huge volume of
tax-exempt obligations to the present market. My concern and my message can
be briefly summarized:
The possible high level of new issues of tax-exempt State and local bonds over
the next decade raises very serious problems for State and local governments
and for the equity of our Federal tax system. This high level can come about
under the enormous financing requirements of the vast social programs so
vitally necessary to meet our domestic needs.
The basic problem is that piling more and more reliance on the tax-exempt
privilege as a way of helping States and localities to meet these financing
requirements creates a powerful buyer's market for tax exempts. The State
and local governments pricing their bonds on the basis of this exemption as a
consequence will get less and less for it-that is, they will have to pay closer
to the market rates of interest on taxable bonds--and their financing costs must
inexorably rise. At the same time, the buyers would still get the tax exemption
with even greater tax savings.
Those w-ho are anxious to preserve the strength of State and local governments
in the Federal system should give serious thought to these problems.
We should all consider whether new financing techniques are available and
appropriate to avoid these problems-techiiiques w-hich at the same time, and
I stress this, preserve the independence of action on the part of State and local
governments in our national system to which the principle of tax exemption
has contributed.
Projections of State-Loca-i Credit Deni an ds
Let us first consider the rate of growth of new State and local issues that looms
ahead. The Joint Economic Committee in 1966 made a projection of the likely
level of growth capital needs and thus of State and local bond issues through
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1975. The JEC figures themselves suggested that this growth would be in line
with the likely growth in GNP. Since the supply of savings should also grow at
about the GNP rate, the general conclusion would be indicated that the market-
ability of State and local bonds should not change markedly relative to other
bonds.
But the Joint Economic Committee report itself emphasized one reservation
about this outlook, namely, the heavy reliance placed on commercial bank takings.
They recognized that if commercial banks, for example, were attracted more
heavily into mortgages (e.g., by the much touted housing boom of the 1970's)
there would be problems for State and local governments in floating even a level
of State and local issues that was growing in line with GNP.
Another set of qualifications should be added to this forecast of marketability
of State and local bonds. The JEC projections basically assumed a development
of current programs. They did not make much allowance for new programs.
The expansion of Federal programs that lies ahead is likely to induce even
more substantial increases in State and local government borrowing than may
have been anticipated in the study. The Congress has already considered a wide
range of new Federal programs in a variety of areas, such as pollution control
and housing. In addition, pressures on the Federal budget have recent1y caused
attention to be focused on the potentialities of debt service grants to State and
local governments, as are now used in the public housing area, rather than the
lump-sum grants that have been more traditional. From a financial viewpoint,
these debt service grants would shift the financing of the Federal share of local
project costs from the taxable market (i.e., away from the Federal bonds that
provide the funds for the lump sum grants) to the tax-exempt market to absorb
the local bonds that would be issued to finance the project (the debt service
grants would help defray the interest and principal on these tax-exempt bonds).
Another factor that may well have been underestimated in the JEC work is
the size of replacement needs. For example, much of the physical plant in our
urban school system is aged and inadequate to the school needs of urban children.
Replacement will be very expensive. These replacement needs alone could cause
the annual net increase in State and local bonds to double in the next five to ten
years.
In summary, the growth of new programs especially Federally aided ones, the
increasing reliance on debt service grants to shift Federal debt to State and local
debt, and exploding replacement needs could increase the annual net growth in
State and local debt from the present $9 or $10 billion as high as $30 billion a
year in 10 years. This would represent a rate of growth twice as high as the rate
of growth of the savings supply.
If State and local governments are to sell this enormous increase in tax-exempt
bonds, then they will be commanding a larger share of the savings flow. To do so
they will have to compete more sharply with other borrowers, such as home
owners and corporations. The question is whether tax exemption is an efficient
instrument with which to conduct this competition. We can take as a fact of
life the exemption on tax-exempt bonds in the present market. The experts say
that this exemption is "inefficient" in the sense that State and local governments
get less benefit from it in lower interest costs than the Federal Government gives
up in lost tax revenues. As I said earlier this could, however, be regarded ~ts the
price paid for the independence of decision-making that the interest exemption
offers in general to State and local governnients. What we need now to do, how-
ever, is to give serious thought to the question of how this will work out if State
and local governments suddenly try to become much heavierborrowers.
The Market for Tax-Exempt Bonds
To understand the significance of this enormous potential growth in tax-exempt
bonds, it is necessary to remember that the institution of tax-exempt interest
has an impact not only on Federal tax returns but also on bond markets. It
does save State and local governments money by reducing interest rates on
their bonds, but it does so by narrowing the range of customers for those bonds.
It narrows the range to groups that find tax exemption valuable. You don't find
exempt pension trusts buying tax-exempt bonds.'
The rate on tax exempts is determined, like any other price, by demand and
supply. If the supply of tax exempts is limited, they can be sold to the buyers
`Tax-exempt entities have purchased tax-exempt obligations in the past and still do
because of legal limitations on their investment powers. These limitations, however, are
rapidly being removed.
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who are most anxious to get them. If more tax exempts are to be sold, the price
of those tax exempts will have to fall, i.e., their interest rate must increase. The
price fall will be necessary to get existing buyers to take more tax exempts (and
thus less of other investments) and to induce new buyers to enter the tax-exempt
market.
It is significant that interest of all kinds-taxable and tax exempt together-
is a modest component of the income of upper income individuals. That income
consists mostly of dividends and capital gains, reflecting the fact that the wealth
position of these individuals inclines them to the higher risk-higher return fea-
tures of equity investment (which features are also associated with favorably
taxed capital gains and untaxed unrealized appreciation). Inducing these in-
vestors into the relatively safe investment of State and local government bonds
through tax exemption is in a sense sw-imming against the tide.
By and large since the most distinctive feature of these State and local bonds
is their tax exemption, the process of selling more bonds must involve widening
the market by appealing to taxpayers with lower marginal tax rates than those
now acquiring tax-exempt bonds. The appeal must involve the process of selling
tax-exempt bonds at rates more closely comparable to those on taxable bonds,
so as to make the exempt bonds attractive to those who get less tax advantage
from the exemption.
The Inevitable Increase in Interest Rates on Tax Exempts-and Higher Uosts
to Local Governments
It is not possible to say exactly, how much tax-exempt bond interest rates
would rise with an increase in the relative share of tax exempts in the market.
Obviously, it depends for one thing on the levels of general interest rates, which
are subject to a great many forces. We can make some progress if we assume
the present level of rates and talk about the differential between high grade
municipals and high grade corporates. Presently, high grade municipals sell at
close to 70 percent of the rate on similar high grade corporates.
In 1945-46 the level of outstanding municipals, as well as new municipal issues,
was very low. Municipals constituted only 3.2 percent of net public and private
debt, and the interest yield on outstanding municipals was only 40 percent of the
yield on corporate Aaa bonds. By 1954 the State and local indebtedness had risen
to about 5.8 percent of net debt, and the yield ratio had risen to 70 percent of
the corporate bond yield. The yield ratio has hovered about this level since 1954,
rising to about 80 percent in 1957 and averaging about 67 percent in January-
August, 1968. The large item accounting for the recent pattern of a wider spread
despite a still increasing State and local debt share (now 8.0 percent of net debt)
is the sharp growth in holdings of municipals by commercial banks (associated
with some pause in the growth of demand for mortgage money between the im-
mediate post-World War II housing boom and the coming housing boom that will
be associated with the World War II baby boom) and the unusual spurt in
corporate bond flotations.
I am including a Table-Table 1-that presents some estimates of the pos-
sible response of the State and local bond rate to future developments. The table
covers a range of possibilities respecting the size of State and local borrowing
and the role of commercial banks in the market, since they are now the dominant
institutional investor in municipal bonds. The future course of that role is of
obvious importance-can the banks continue that role, keeping in mind that busi-
ness loans are their primary function? What happens when they reach the
limits of their taxable income, as some are now doing, so that the use of ex-
penses, in fact allocable to tax-exempt issues, against taxable income as now
permitted no longer produces tax savings?
Table 1 shows that the interest rate increases resulting from a high volume of
tax-exempt securities could be put as likely to be about one-half point (keeping
in mind that it might come to a full point). At current levels of State and local
debt issuance ($15 billion gross) this would mean an increased anual interest
cost of around $75 million on one year's issues. This annual cost would of course
cumulate if the increase persisted for subsequent new issues. With new issues
rising at 10 percent a year, a persistent increase in the State and local bond in-
terest rate of one-half point would increase the annual cost by about $500-$600
million in seven years. This increased cost, remember, does not include the in
creased debt service itself. which would be something in addition. The increased
cost is just the cost of the interest rate increase caused by the increased debt.
It is the increase in cost caused by going to the well too often.
This is a substantial burden to put on local property taxpayers.
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131
The Inevitable Increase in Interest Hates on Tax Exempts-and Higher Tax
Savings to Buyers
This is not the full story, however. This process of bidding up the interest rates
on tax-exempt bonds means that their benefits will automatically become much
larger to those upper bracket taxpayers who are already buying them and would,
of course, continue to do so under such higher interest rates. In addition, the
higher interest rates will bring more and more lower rate taxpayers into a posi-
tion where the exemption makes holding State and local bonds attractive even
at their lower marginal rates.
Table 2 shows for taxpayers at various effective rate brackets the value of tax
exemption for investment in State and local bonds which yields $100 of exempt
interest at current rates. The taxpayer in the 70 percent tax bracket who earns
$100 in exempt interest when the exempt interest rate is 70 percent of the
corporate rate is in effect initially sacrificing $43 of beford-tax yield. But he is
then rewarded by the larger after-tax benefits. Thus, if he had obtained a tax-
able bond paying $143 (of which 70 percent is $100), he would have paid a tax
of $100 and would net $43. The purchase of a tax-exempt bond instead thus
already produces a saving of $57 for every $100 he receives in exempt interest.
We can now see the increased benefits for taxpayers when the State and local
governments go to the well too often. The increased interest cost indicated in
Table 1 is an increased payment on bonds that would have `been sold anyway to
the present buyers. The result therefore is an automatic increase' in the tax
savings enjoyed by the present group of buyers of tax-exempt bonds, which they
enjoy because the market discount on the bonds is less than the tax savings the
bonds provide. Thus, if the interest rate on exempt bonds rises to 85 percent of the
corporate bond rate, the net saving of $57 for a taxpayer in the 70 percent bracket
will rise to' $78-a gain of 37 percent.
TABLE 1.-SOME PROJECTIONS OF THE SPREAD BETWEEN STATE AND LOCAL (S. & L) BOND RATES AND
CORPORATE RATES 1
Rate on high grade
S. & L. bonds as a
percent of corporate rates
Difference in points
between high grade
S. & L.'s and corporates
Rate on high grade
S. & L. bonds
(in percent)
With With
S.&L. S.&L.
With With
S.&L. S.&L
With With
S.&L. S.&L
Rate of growth of State and
local bonds outstanding
market market
favorable3 unfavorable
market market
favorable unfavorable
market market
favorable unfavorable
GNPrate(6percent)2
Moderate rate (10 percent)
High rate (20 percent)
70 75
75 80
80 87
1.8 1.5
1. 5 1. 2
1.2 .9
` 4.4 4.7
4. 7 5. 0
5.0 5.3
1 Assumes corporate AAA rate at 6.2 percent. The 70-percent relationship used as a base point here reflects the typical
relationship of recent yeers rather than the 67-percent current relationship.
2 This would be a sharp slowdown for State and local government borrowing.
3 The favorable-unfavorable distinction involves the role of commercial banks in this market. Rates will be favorable
to State and locals if commercial banks remain a large holder. They will be unfavorable if commercial banks hold a smaller
share.
Looking down Table 2 one can see that as the relative interest rate on State and
local bonds rises, taxpayers at lower marginal tax rates come into the ~osition
where they would be saving more in taxes from the exemption than they would
lose on the interest differential; that is, their tax savings (which is the Fed-
eral Government's revenue loss) would be greater than the savings in interest
to the State and local governments. If the State and local rate rises to 85 per-
cent of the corporate bond rate, even a taxpayer whose marginal tax rate is over
15 percent would find these bonds a good investment.
In summary, the penalties for excessive reliance on the tax-exempt privilege
to finance new programs are substantial. These penalties will be visited upon
State and local governments through increasing the interest rate on all the bonds
they sell, including the basic school bonds that they will have to sell anyway.
The result occurs `because the advantage of the present tax-exempt privilege of
State and local `bond interest works in a limited market than can be swamped by
overuseof the tax exemption.
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TABLE 2.-VALUE OF TAX EXEMPTION FOR VARIOUS TAXPAYER SITUATIONS BEFORE AND AFTER A RISE IN
EXEMPT BOND RATE RELATIVE TO CORPORATE RATE
- Net advantage of tax exemption on an invest-
ment of $23001 when the exempt rate
relative to the corporate rate is- -
Marginal tax rate (in percent) 70 percent 80 percent 85 percent
70 $57 $71 $78
60 `~ 57 64
48 26 40 47
30 0 14 21
20 -14 0 6
15 -22 -3 0
1 An investment of 52.300 was chosen because it produces exactly $100 of exempt interest at current rates.
At the same time the tax savings to present buyers of bonds will rapidly pyra-
mid and new groups of buyers will be drawn to these tax benefits. This expan-
sion of the tax preference will be coming at a time when the patience of many
with existing tax preferences is becoming exhausted-as is shown by the rapid
and widespread rise in sentiment for a minimum income tax to counteract the
effect of tax preferences that now permit many taxpayers with high annual
incomes to pay little or no Federal income taxes.
State and local governments should look carefully at their "friends" who
want to maximize the use of tax-exempt bonds in meeting the costs of new
programs. These data would indicate that such maximization is really more
likely to help bond buyers and to hurt the bond sellers-who are the State and
local governments.
The recent experience with arbitrage bonds and industrial development bonds
should cause some moments of quiet reflection for those who up to now
have adamantly refused even to talk about these disturbing possibilities or con-
sider solutions for them that woulld alter the traditional patterns. There were
those who saw no abuses or dangers whatsoever w-hen the volume of industrial
development bonds suddenly skyrocketed last year and the size of such issues
rose to $100 million and $150 million figures. When the Treasury Department
called attention to this situation and to the severe effects that could occur if
larger and larger volumes of private business financing w-ere converted into tax-
exempt financing, there were those w-ho sought only to characterize its concern
as an attack on the tradition of tax exemption.
The more perceptive-and your organization merits high marks in this re-
gard-recognized however that the Treasury attitude and its subsequent action
were designed to prevent a distortion of that tradition that could all too easily
cause its erosion or destruction. And now that these large industrial issues have
passed from the scene under the recent legislation and the local government bond
market will not have to absorb the corporate bond market, even the voices that
had called doom and calamity when the Treasury acted are now admitting to
"abuses" they had not been able to see before. But in the meantime, that attitude
of head in the sands, of see or speak or hear no evil, did net make it any the easier
to shape the needed corrective steps. The task-difficult enough in itself-of
structuring those steps, of meeting the many technical problems that corrective
tax measures inevitably entail, is certainly not made any the lighter if those with
knowledge of the operative facts choose to withhold their experience and refuse
constructive cooperation in favor of an adamant stance that denies there is
anything to worry about.
As a result, one would hope that there can be a calm appraisal of these possible
new developments I have described and their consequences. And if they are likely
to occur-as many believe-one would hope there can be a calm analysis of pos-
sible new- financing techniques to avoid those consequences. Let us therefore
turn to this phase of the discussion.
Possible New Financing Tecliniqnes-Locai Tanable Bonds
In a talk on June 13, 1968 before the Municipal Forum of New York I de-
scribed one possible new financing technique-that of local taxable bonds. I gave
the example of a local project-it could be an anti-pollution project, an airport,
an urban development project, and so on-as to which Federal assistance would
be provided not through the traditional initial capital grant but through a system
of paying part of the debt service of a bond issued~ by the locality to meet the
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cost of the project. The Federal share of the debt service-as respects both
principal and interest-would be paid periodically over the life of that bond.
I then indicated `that instead of having the local bond a tax-exempt obligation,
there could be used instead a local tawable obligation with two attributes: the
Federal Government would fully guarantee the bond and, in addition, would use
the tax revenue gained through the taxable status to pay to the local government
an interest subsidy that would bring the interest cost to it down to a level lower
than, or at least comparable to, the interest rate on a tax-exempt bond. This in-
terest subsidy would be in addition to `the share of the annual debt service
provided by the Federal Government.
I described this approach as a new type of joint venture by the Federal and
State and local governments for these social projects, with a method of financing
that would benefit both governments. This was the approach presented earlier
this year by the Administration as a way .to start an increased number of anti-
pollution projects
The State and local government groups. in general responded negatively-in
a positive way !-and opposed the Administration's proposal, stating that the
local bonds should be of the traditional tax-exempt type. Another suggestion
was for a two-bond approach-a tawable bond issued by the local government for
the Federal share and paid off by Federal funds, and a taw-ea~empt bond issued
by the local government for its share.
Our bond experts then went to work to evaluate the comparative costs of the
three approaches-single taxable bond, single tax-exempt bond, and two-bond
approach. The crucial issue in this comparison is the cost to the local
government.2
Here our experts believe that a tax-exempt approach either as a single bond
or part of a two-bond suggestion, would cost the local government more than
would the single taxable bond. Under their analysis the effect of the enlarged
volume of these new `tax-exempt issues on the interest rates for tax exempts
generally-the point I have discussed earlier-would involve a higher cost to the
local government on its overall borrowings than would the issuance of taxable
bonds after the interest subsidy. Hence, -a Mayor faced with paying for both a
new school and a new social project would save his communi'ty money by choos-
ing a single taxable bond for the social project rather than using a tax-exempt
bond in whole or in part.
There are two questions in this analysis that deserve careful attention. The
first is `the possible rise in interest rates on tax-exempt securities if that market
really faces the enormous increase in load I have earlier described; the second is
the rates at which local tenable bonds would sell bad. I have the feeling that
knowledgeable persons could reach a consensus on the first of these questions
and that such consensus is likely to be along the disturbing lines our experts
foresee. There may be a wider range of disagreement on the second question.
Some priva.te analysts may doubt that the market prospects for local tawable
bonds would be as good as our experts expect. They may believe that interest,
especially bank interest, in local small, long-term serial issues would be limited
to tax-exempt issues. The taxable local bond would be a new type of obligation-
a new animal-and some analysists believe tha.t the new animal would not be
readily accepted by the market for a long time to come, if ever. Since the market-
ability of obligations depends on their ability to be readily sold and bought,
this lack of ready acceptability could be an adverse fac.tor. They say a bank
that would buy a tax-exempt bond of City A won't buy a taxable bond of that
city even if the taxable rate is adequate to cover the absence of tax exemption.
The impact on interest rates of the future pressures on local financing will
therefore be less in their judgment if the local governments were to meet these
pressures by using obligations of established acceptability rather than breaking
new ground. They concede that a full Federal guarantee for the local taxable
bonds could go a considerable way to counteract these attitudes since the guar-
antee would meet concerns as to credit and rating. But still they believe the
2 As respects the Federal Government, the cost of a tax-exempt approach, whether it
be as a single -bond or a part of the two-bond suggestion, is greater in view of the loss
of the tax revenue that would come from using a tax-exempt bond. This loss is greater
than the interest savings to the local government and therefore greater than the interest
stibsidy that would have to be paid to equalize the local government's borrowing costs.
And we must remember that the cost of the debt-service approach is greater to the Federal
Government than the initial capital grant approach, since the interest on taxable local
obligations would be greater than the rate at which the Federal Government can borrow
directly to cover the capital grant.
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134
newness of the local taxable bonds would affect their marketability and cause
their interest rates to be higher than our experts have assumed-and indeed
perhaps to cause a rise in the whole range of market interest rates.
I am not here to weigh these doubts or come to a decision on the differing
predictions. Rather, I wish to bring the questions to your attention and to urge
their serious consideration. That consideration requires a careful effort to de-
scribe with particularity the weaknesses in the use of local taxable bonds, if
weaknesses there be. The next step in the process must then be to ask whether
other financing techniques could meet those weaknesses. For, if our belief that
reliance on the traditional tax-exempt approach to meet the enormous future
load on local financing has its own serious problems, to say that the taxable
approach may have its weaknesses cannot end the inquiry-so does the tax-
exempt approach and its weaknesses seem to be by far the greater.
Possible New Financing Techniques-a Central Financing Institution
Those who have doubts about the local taxable bond approach in large part
place their concern on the difficulties of marketing these small novel issues.
Would that concern disappear if a central institution took over the financing on
a taxable basis? This possibility calls attention to recent Treasury discussion
of a National Urban Development Bank-a concept suggested by Vice President
Humphrey on July 2, 1968 to help solve the problem of financing the needs of
American cities.
In brief, as one possible framework, such a Bank would be a non-Federal
institution financed initially by an appropriation of Federal funds and then
through subscription of non-Federal funds. It would issue its own obligations
in the market, and these would be taxable. They would be guaranteed by the
Federal Government. The obligations could involve maturities, characteirstics
and amounts that would make them marketable at competitive interest rates.
Congressional control could be assured by requiring regular approval by the
Congress of the dollar volume of obligations issued by the Bank.
The Bank, as one of its activities, could then accept obligations of local gov-
ernments issued to meet their financing requirements for the new social projects.
It could utilize affiliated regional banks for this purpose. It could accept such
obligations at interest rates that would involve a subsidy so as to provide inter-
est costs to the local governments low-er than, or at least comparable to, the
interest rates on tax-exempt bonds-the parallel to the subsidized local taxable
bond approach. The cost to the Bank of this subsidy could be met by Federal
appropriations to the Bank, with these appropriations in turn being financed
ultimately (not earmarking necessarily) by the increase in revenue to the Fed-
eral Government through having the obligations of the Bank taxable, as com-
pared with the revenue loss if traditional tax-exempt local financing were used.
Federal assistance for the local projects, such as the partial annual debt
service grant I described earlier, could of course be a part of the arrangement.
The terms of that assistance could be established under the particular substan-
tive Federal legislation governing the social programs involved-anti-pollution,
urban development, etc. The mechanics of that assistance could be handled
through the Bank, thereby avoiding a proliferation of the channels of assistance.
The financing of that assistance could be through Federal appropriations to
the Bank. The Bank, of course, could make loans and provide assistance to pri-
vate groups as well.
Such an Urban Development Bank-Community Development Bank might be
a more descriptive term since it could handle rural as well as urban programs-
would appear to meet the problems some may see in the local taxable bond ap-
proach previously discussed. The Bank, in effect, permits a pooling Df the various
local government obligations, so that the disadvantages of issue size, of lack
of a ready market in which the local taxable bonds could be sold and bought,
and of novelty are all eliminated. The bank instead would be raising the funds
involved in the private market on a centralized taxable basis, in a volume suffi-
ciently large and with a Federal guarantee so that the rate of its obligations
would be as comparable as possible to taxable Treasury bonds. The financing
See Remarks of Frederick L. Deming, Under Secretary for Monetary Affairs, Graduate
Schoo1 of Banking, University of Wisconsin, August 27, 1968 (Treasury release F-1339)
Remarks of Under Secretary Joseph W. Barr, California Savings & Loan League, Anaheim,
California, September 18, 1968 (Treasury release F-1349) ; Remarks of Frank W. Schiff,
Deputy Under Secretary for Monetary Affairs, Municipal Treasurers Association, Wash-
ington, D.C., August 21, 1968.
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135
of the social progrdms would thus be made at a lower cost to the Federal Gov-
ernment than would be involved in the local taxable bond approach-where the
size of the annual debt service grants of the Federal Government would be gov-
erned by the local tawable bond rate and not the rate on Federal obligations.
Finally, the State and local governments could participate directly in the man-
agement and control of the Bank itself. Use of the Bank would be on a voluntary
basis however-any State or local government could still finance projects di-
rectly through its own obligations. Hence the accommodation to independence
of State and local governments, that factor which these governments see as the
essence of the tax-exemption privilege, can be achieved through a proper struc-
turing of the Bank.
I commend the concept of a Development Bank to you for your close study and
consideration. Here also you have the opportunity through objective analysis
to weigh the possibilities of this new approach and then if it offers promise, to
use your experience and wisdom to shape its structure and its future.4
Conclusion
In conclusion, let me return to the summary I gave you at the outset:
The possible high level of new issues of tax-exempt State and local bonds over
the next decade-a level required to meet the huge financing requirments of the
vast array of needed social programs-raises very serious problems for both
State and local governments and the Federal Government. The price for the
State and local governments in the use of tax-exempt bonds on such a greatly
increased basis under those programs will be in very sizable increases in their
interest costs. The price for the Federal Government will be in serious inroads
on the equity of its tax system.
Those anxious to preserve the strength of State and local governments should
seek to develop new financing techniques that avoid such a high price.
Two possible new financing techniques are offered for consideration: One is
the use of local taxable bonds placed directly on the market. The second is a
pooling of local obligations through a central non-Federal new financial insti-
tution which would raise its funds in the private market on a taxable basis.
Both approaches involve Federal guarantees for the obligations to be issued,
and `both permit the local governments to receive an interest subsidy to offset
their departure from the use of the tax-exemption privilege. But also permit the
social projects initiated by the local governments to receive Federal assistance
for those projects according to the particular substantive programs affecting
them. Finally, both approaches permit that independence of local government
which is now obtained through the tax-exemption privilege, but do so without
the inefficiency and consequent wastage of funds now associated with that his-
torical solutiOn to one of the problems of our Federal system.
In sum, there are paths to be explored by those who are willing to face this
serious problem in a constructive way. That very exploration can in turn open
up still other avenues for consideration. The proper Federal role and the proper
State and local government role in the necessary Federal-State--local partnership
required to meet the fast growing credit demand for new public facilities and
social projects can thus be structured in the light of our pressing present needs.
For we are at a crucial crossroads. One way, a `blind following of the past,
could financially weaken State and local governments and thereby weaken the
independence of these governments though outwardly preserving the trappings
of independence. The other way, utilizing our knowledge of newly developed
credit tools and the new financial institutions to operate them, can preserve
and advance that independence.
One financing technique not suggested here is that of Federal tax incentives to private
industry. This is not to say that Federal assistance to industry may not be part of the
overall program to provide the needed social projects. It is to say that such assistance
could far better come through direct Federal outlays, in the form of payments for industry
services, or loans or grants. It is believed that such a direct approach rather than "back
door" financing through tax inceatives, with its inefficiencies and waste and non-disclosure
in the Federal Budget, is far more appropriate. Indeed, for many similar reasons the
direct approach of the financing techniques suggested in the text is presented as offering
advantages over the tax route of tax-exempt obligations. But this is not the occasion
to discuss tax incentives at length. Those interested may consider my remarks before
the Dallas Chapter of the Financial Executives Institute. Dallas, Texas, Taxes and the
Federal Budget, February 13, 1968 (Treasury release F-1161).
PAGENO="0140"
136
Excunu'r FRoM REManns BY HoN. FREDERICK L. DEMING, UNDER SECRETARY OF
THE TREASURY FOR' MONETARY AFFAIRS, AT THE GRADUATE SCHOOL OF BANKING,
UNIvERsITY OF WIsCoNsIN, MADISON, WIS., AUGUST 27, 1968
* * * * *
FINANCING NEW NE~5
But, if life is easier now and prospects are for lesser problems in Treasury and
agency finance throughout fiscal 1969, there are some major financing problems
that lie ahead of us. I have referred to the problems of the urban areas; obviously,
we must find ways to meet them and to meet them in sound financial style.
In a talk I gave in St. Louis in November, 1965, I discussed in some detail
problems of coordinating the offerings of the multiplicity of Federal agencies
dealing directly with the market, each with its own scheduling problems and
each with fairly specific financing objectives or requirements. I also discussed
the growth and diversity of the underlying Federal credit assistance activities
which gave rise to these agencies. I suggested that we give pretty free rein to the
imagination in considering alternative approaches to improve the coordination
of the financing of these activities and, thus, to minimize the financing costs
and the impact on financial markets.
In October, 1966, in New York, Under Secretary Barr also spoke of the prob-
lem of coordinating the financing of the myriad Federal credit program agencies.
He suggested that perhaps the next step in this area might be the establishment of
a new central Federal lending corporation, which would obtain funds for pro-
grams economically and efficiently by issuing its own obligations in the private
market.
On July 2, 1968, Vice President Humphrey suggested the establishment of a
National Urban Development Bank to help solve the central problems of financ-
ing the needs of American cities. This would be essentially a program for Federal
underwriting of loans. The Bank would be financed initially by an appropria-
tion of Federal funds and then through subscription of private funds. It would
issue its own obligations in the market and would make loan funds available
through affiliated regional banks at varying interest rates to help finance pub-
licly-sponsored projects, especially, but not exclusively, in the inner cities.
Federal appropriations would be provided to cover the differential between the
interest rate paid in the market by the Bank and the subsidized rate to the
borrowers.
I believe that such an approach offers a basic solution to the long-standing
problem of providing effective Federal financial aid to State and local public
bodies. The interest on obligations issued in the market by the Bank would be
subject to Federal income taxation without involving the direct taxation by
the Federal Government of obligations issued by States and localities them-
selves. This is the way we conduct our present programs of direct loans-since
these programs are, in effect, financed in the market with taxable Treasury
bonds-except that direct Federal loans require immediate Federal budget
outlays.
The proposed new Urban Bank may require initial Federal contribution but
would then require budget outlays only as necessary for interest subsidy pay-
ments over the term of the Bank's borrowings. Since the Bank would not require
actual Federal stock ownership, it would not be included in the Federal budget.
This broad-purpose Urban Bank would go a long way in meeting the financing
needs of the cities. It also would help avoid further proliferation of Federal
lending agencies and w-ould have the advantages of size and flexibility in its
marketing operations which would assure orderly financing at the lowest pos-
sible borrowing rates.
The Urban Bank proposal may also suggest the proper future Federal role
in the necessary Federal-State-local partnership to meet the growing credit
demands for public facilities. I believe that the Federal role should lie primarily
that of guarantor. There is no reason why the Federal Government, itself, should
be getting ever deeper into the essentially administrative chores of loan orig-
ination and servicing which can be performed just as well or better by existing
private financial institutions or by new non-Federal institutions such as the
proposed Urban Bank. Nor is it necessary or practical for the Federal Govern-
ment itself to build up a large portfolio of loans. The essential Federal con-
PAGENO="0141"
137
tribution can be provided in the form of debt service subsidies over the term of the
loans and Federal assumptions of the unusual loan risks.
While a Federal backstop behind the Bank's obligations is an appropriate
means of a~suring the investor in these obligations against loss and thus mini-
mizing the Bank's borrowing costs, the Federal guarantee should not be ex-
pected to be used, or looked upon as a means of providing further subsidy of
protection to the local communities themselves. The defaults on State and local
bonds over the past several decades have been virtually nonexistent, and I
believe this record should `be maintained. The Bank can serve as a useful chan-
nel for Federal interest and other subsidies for the `benefit of local community
projects; these subsidies should be in predetermined amounts sufficient to make
the local `projects economically viable. Any loan made `by the Bank should `have
a reasonable assurance of repayment. The management `and staffing of the Bank
should be of the highest caliber. I think these principles are essential to the
establishment of the Bank in the private market on a business-like and fully
self~supporting basis.
`The Bank should also not be viewed as a substitute for sources of credit al-
ready available in the private market. As the Vice President stated in his July 2
speech, the funds of the Bank would `be available for programs which cannot
be financed through other means.
There should be firm control by the Congress over any subsidies provided
to local communities through the Bank. While it woul'd be essential to the
efficient marketing of the Bank's obligations to pro'vide advance assurance that
Federal interest subsidies will be forthcoming in a `timely manner to meet the
Bank's own debt service requirements, this can `be done without any loss of
Congressional control by requiring regular approval by the Gongress of the
dollar volume of new obligations issued by the Bank with a Federal commit-
ment to pay part of the debt service.
Chairman PATMAN. In fact, it has many advantages, I think.
Mr. Zwicic. If I can just interrupt briefly, the bill we will submit
for the Administration anticipates exacUy that course.
Chairman PATMAN. I am pleased to hear that. You know, the com-
mercial banks that manufacture `their money under the Government's
credit bought 94 percent of all tax-exempt bonds last year. And so
if they were not using the Government's credit to buy tax-exempt bonds,
we would have plenty of money for housing. So that is a fine giant step
in the right direction.
I think it is an amazing record to change the budget situation from
a big deficit t~o a surplus in 1 year. This is certainly good news. How-
ever, I think we all want to be sure that it is a realistic budget and
that we will not find later on that it is too low, and I will ask you
gentlemen to comment on that when you look over your transcript.
(The Council of Economic Advisers supplied the following:)
REsPoNsE FROM CouNcIL OF EcoNoMIc ADvIsERs
The estimated increase in Federal revenues (excluding employment taxes)
for the fiscal year 1970 is indeed a strikingly low figure. That rise of a little
over $7 billion seems small not only in relation to the huge increase of fiscal
1900 ,but also to the normal growth that might be expected. As the Treasury
response points out in detail, there are two principal sets of factors that account
for this result. First, the retroactive features of the surcharge and the accelera-
tion of corporate tax payments produced a non-recurrent addition to the level
of receipts in fiscal 1969. Although this does not lower the level of receipts in
fiscal 1970, it does make the increase from fiscal 1969 to fiscal 1970 smaller than
would otherwise be the case. Second, the prospective moderation in the advance
of economic activity, and particularly the very modest further increase expected
in corporate profits, holds down the estimated growth of revenues during fiscal
1970.
PAGENO="0142"
138
(The Treasury Department subsequently furnished the following:)
RESPONSE FROM TREASURY DEPARTMENT
The key factors behind the change in the budget situation from a big deficit
to a surplus are as follows:
Receipts in the fiscal year 1969 are estimated to rise $32.4 billion over actual
receipts in fiscal 1968. This is substantially greater than any increase in the
past. The large receipts reflect the combination of the record gain in economic
incomes realized in the calendar year 1968 and legislative changes enacted in
1968 and in prior years.
GNP in calendar 1968 rose $71 billion over 1967. Reflecting this record gain
in economic activity, personal income rose $57.0 billion-also a record. Corporate
profits before tax rose $10.7 billion. Although not a record, this figure was
exceeded only by the gains in profits in 1950 and 1965. As a result of these
gains in income and economic activity, receipts in fiscal 1969 are expected to
rise by approximately $14 billion.
Legislation contributes to an even greater degree to the increase in fiscal
1969 receipts-by approximately $18 billion. The income tax surcharge, the accel-
eration in corporation tax payments, and the excise tax rate extensions enacted
in 1968 will increase receipts in fiscal 1969 by almost $14 billion over 1968
receipts. Employment taxes rose by $4.0 billion in fiscal 1969 because of legislation
enacted in 1967. A part of the gain comes from the full-year effect in fiscal 1969
of the increase in the wage base from $6,600 to $7,800 effective January 1, 1968
(and only partiaiily effective in fiscal 1968). The remainder arises from the part-
year effect of the increase in the combined tax rate from 8.8 percent to 9.6 percent
effective January 1, 1969.
(Note: The effect of legislation and growth in economic incomes is discussed
in greater detail in the answer to the fourth question of the Chairman.)
(The following was received from the Bureau of the Budget:)
BUREAU OF THE BUDGET RESPONSE TO MR. PATMAN'S QEu5TION CONCERNING THE
REALISM OF THE 1970 BUDGET
The estimates in the 1970 budget are, in my opinion, realistic and appropriate
to the economic outlook and the Government's program commitments at home
and abroad.
The basis for the revenue estimates is explained in the material submitted by
the Treasury Department. With respect to outlays, as I pointed out in my testi-
mony, barring some major development not now- predictable, the estimate for
fiscal year 1969 is reasonably firm. The expenditure levels for the first five
months of the current fiscal year, July through November, were-after adjust-
ment for seasonality of agricultural and construction programs-at an annual
rate of $181 billion. The estimated total of $183.7 billion for the year could be
met, therefore, even -if the rate of outlays during the remaining months of the
year increased to nearly $187 billion. Similarly, the defense figures. to date allow
leeway for a higher rate of outlays in the last half of the fiscal year than in the
first half.
For fiscal year 1970, the budget reflects a general restrictive expenditure policy
in recognition of the need for holding down Federal outlays in a time of infla-
tionary pressure. The budget also recognizes the need for continued executive
management of outlays, as an outgrowth of statutory controls imposed for fiscal
year 1968, and particularly for 1969. For these years, the Congress departed from
traditional appropriations procedures and placed direct restrictions, first on ob-
ligations, and then on the overall level of outlays. As a result, a considerable
amount of enacted budget authority already obligated or now moving to the
stage of obligation could convert to outlays in 1970, in addition to the amounts
to be spent out of new budget authority recommended for 1970. Accordingly, a
policy of strict management of outlays must be maintained in order to hold 1970
outlays to an appropriate level.
Within the necessary tight budget policy, the estimated outlays of $19a.3 bil-
lion for 1970 represent a realistic effort to meet pressing national needs. In-
PAGENO="0143"
189
creases are provided for strengthening our defense forces and for expanding
urgent domestic programs designed to further the economic and cultural advance-
ment of disadvantaged groups within our society. The overall rise in outlays of
$11.6 billion, estimated from 1969 to 1970, provides substantial increases for im-
proving education, expanding health and welfare services, aiding our cities, en-
largmg the housing available to low and moderate income families, and combat-
ting crime and disorder. These increases have been made possible by selective
restrictions or reductioi~s in programs elsewhere.
The priority choices which had to be made were difficult, but necessary. Lim-
ited budget resources, mandatory program requirements, and the need for re-
sponsible fiscal and economic policy were important in determining those choices.
Given these considerations, the 1970 budget represents a sound and realistic
program for the current and coming fiscal years. Continued economic growth,
restraint over budget outlays, and extension of existing levels of income and
excise taxes, as recommended in the budget, can reasonably be expected to pro-
duce the surpluses estimated for both fiscal years 1969 and 1970.
Chairman PATMAN. Why is the increase in tax receipts for 1970 so
small? $5~4 billion of this is social security taxes, so it leaves just
about $7 billion for the normal increase from year to year. This figure
has been higher in recent years.
Does this mean that you expect a sharp slowdown in the second
half of 1969?
So, if you will answer that, please.
(The reply from the Council of EcOnomic Advisers follows:)
The estimates for Federal expenditures in fiscal year 19G9 should be reason-
ably firm. Those for fiscal year 1970 necessarily involve greater uncertaintly, but
they are down-the-middle estimates consistent with the recommendations of the
Johnson Administration. Mr. Zwick's reply covers these issues in detail.
(In reply, the Treasury Department answers:)
Unified budget receipts in the fiscal year 1970 are estimated at $198.7 billion,
as compared with estimated receipts of $186.1 billion in fiscal 1969 and actual
receipts of $153.7 billion in 1968 The increase from 1968 to 1969 is thus $32.4
billion; from 1969 to 1970, $12.6 billion. Excluding employment taxes, the in-
creases in receipts are $26.8 billion in fiscal 1969 and $7.5 billion for 1910.
The much smaller increase for 1970 is due in part to the reduced rate of eco-
nomic gain estimated for calendar 1909-the period most important in determin-
ing fiscal 1970 receipts-in comparison with the economic gain realized in calen-
dar 1968, the period most important in determining fiscal 1969 receipts. The $60.3
billion GNP rise projected for calendar 1969 is less than the $71.0 billion rise
realized in calendar 1968. Moreover, the relative composition of the income gains
also reduces the rise in tax liabilities in calendar 1969 below that for calendar
1968. The corporate profits share of the projected economic gain in calendar 1969
is 6.1 percent. This is much smaller than the 15.1 percent share in 1968.
Although the effect on receipts of economic growth is less in fiscal 1970 than
in fiscal 1969, the major reason for the substantially smaller increase in recernts
(excluding employment taxes)-$7.5 billion for 1970 as compared with $26.8
billion in fiscal 1909-is the difference in the effects of legislation in the two
years. As shown below, legislation and miscellaneous factors increased receipts
in 1969 by $14.5 billion over fiscal 1968. In fiscal 1970 these factors reduced re-
ceipts as compared to 1969 by $1.7 billion. The major. reason for this difference
is that the income tax surcharge enacted in 1968 increased tax rates, whereas
the proposed continuation keeps tax rates unchanged. The surcharge continua-
tion does produce additional revenues in fiscal 1970 but the increase is not as
large as in fiscal 1969. The additional revenues produced by the surcharge in
1970 are less than the additional revenues produced in 1969 because of the ret-
roactive nature of the 1968 legislation.
The change in receipts for fiscal 1969 and 1970 is shown in detail below.
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140
(Dollars in billionsj
Increase in receipts Change
Fiscal year Fiscal year
1969 1970 1969 and 1968 1970over1969
Other than employment taxes:
Surcharge (enacted and proposed):
Individual +8.4 +8.0 +8.4
Corporation +4. 3 +3. 3 +4. 3
Total +12.7 +11.3 +12.7
Acceleration of corporation payments (1968 act)~ +1.0 +0.3 +1.0
Total +13.7 +11. 6 +13. 7
Excise taxes +0. 2 +0. 2
Total, 1968 act +13. 9 +11. 6 +13. 9
Other proposed:
Quarterly payments of unemployment taxes +0. 3
Usercharges +0.4
Miscellaneous (legislation prior to 1968 an~ change
in payments patterns) +0. 6
Total otherthan economic growth +14.5
Economic growth +12. 3
Total other than employment taxes +26. 8
Emplcyment taxes +5. 6
Total receipts, unified budget +32.4
0.4
-1. 0
-1.4
-0.7
-2. 1
-0. 2
-2. 3
+0. 3
+0.4
-0. 2
-1.7
+9. 2
+7. 5
+5. 1
+12.6
Most of the increase in tax receipts due to economic growth is due to increases
in income taxes, individual and corporate. The increa~e in individuai :ncome
tax receipts in fiscal 1969 is $7.3 billion. This is 12.8 percent of the increase
in personal income, calendar 1968 over 1967, of $57.0 billion. The gain in in-
dividual income tax receipts drops to $6.4 billion ir~ 1970 because the increase
in personal income projected for calendar 1969 falls to $50.2 billion. The re-
ceipts gain is 12.7 percent of the income gain, almost exactly the same as esti-
mated for fiscal 1969.
Oorporation income tax receipts in a given fiscal year reflect, for the most
part, the profits of the calendar year ending in the fiscal year. A significant
amount, however, arises from the first two payments of estimated tax for the
current year. Thus, receipts in the fiscal 1969 depend primarily on profit levels
for calendar 1968 and to some extent on profits for calendar 1969. Receipts in
fiscal 1970 are derived mostly from calendar 1969 but also from calendar 1970
profits.
Corporation profits before tax are estimated at $92.3 billion for calendar 1988.
The gain over 1967 is $10.7 billion. Corporation tax receipts in fiscal 1969 reflect
the large increase in profits. The increase in receipts due to economic growth
is $3.7 billion. Profits projected for calendar 1969 are $96.0 billion, an increase
of $3.7 billion. Primarily as a result of this much smaller increase in profits, the
increase in corporation income tax receipts in fiscal 1970 falls to $1.8 billion.
The two income taxes produce $11.0 billion of the $12.3 billion increase in
fiscal 1969 receipts due to economic growth (excluding employment taxes) and
$8.2 billion of the $9.2 billion increase in fiscal 1970. Other revenue sources pro-
duce $1.3 billion in receipts due to economic growth in 1969 and $1.0 billion in
1970. The difference of $0.3 billion is attributable to customs. Imports are not
expected to show as sharp an increase in 1970 as in 1969 and further steps
in the Kennedy Round duties reductions will limit customs receipts.
Chairman PATMAN. Now, we often talk about, before the Joint
Economic Committee and Banking and Currency and other related
committees, the great financial institutions like the commercial banks,
Stath banks, national banks, Federal Reserve System, and savings and
loan associations, but you seldom mention one great financial institu-
tion that has been growing by leaps and bounds in this country the
last few years. Today we have over 20 million members of credit
unions in the United States. The major States have more than 1
PAGENO="0145"
141
million each, many more than 1 million each. So they are doing a great
service in my book, and should not be further overlooked. They have
assets aggregating more than $14 billion and the work that they are
doing to my mind, is next to the church in importance to the people of
this Nation. And I have been urging an independent agency.
They are administered by civil service employees in one of the de-
partments. In other words, we are almost treating them like they are
stepchildren. And we should have a special independent agency for
credit unions, I think. And I have been urging Mr. Barr to give con-
sideration to this as Secretary of the Treasury and in my own time
I will read a letter I have just received from him, dated January 17,
1969, because this is a matter of great importance, I think, to our
Nation.
DEAR MR. CHAIRMAN: This is in response to your request for views on H.R. 2,
"to amend the Federal Credit Union Act so as to provide for an independent
Federal agency for the supervision of federally chartered crediLunions-and--for-----------~
other purposes." And I am in favor of the objective of providing an independent
agency to supervise federally chartered credit unions.
Time has not permitted a detailed analysis of the provisions of the bill and
in view of the need for expedition, this report has not been cleared with the
Bureau of the Budget in the course of customary procedures.
Sincerely yours,
JOSEPH W. B~nn.
Thank you very much, Mr. Barr.
Now, I yield to Mr. Widnall.
IRepresentative WIDNALL. Thank you, Mr. Chairman.
First, to you, Mr. Secretary, Joe, we hate to see you go.
Mr. BARR. Thank you, sir.
Representative WIDNALL. As a colleague in the House, we always
appreciated your ability, and your contributions. We admired and
respected you and that admiration and respect has continued through
your job as Under Secretary and now as Secretary. You have made
a very fine contribution and all of it has been done with good humor
and an understanding of the legislative process, which some in the
agencies do not have. And I for one know that all of us wish you the
very best, and we hope you are never foolish enough to make enough
money now so that you have to divest yourself when you come back
into the Government. [Laughter.]
To you, Mr. Secretary, the President's Economic Report states that
our international accounts were in balance in 1968 for the first time
since 1957, but this balance has been achieved through "special trans-
actions" such as inducing foreign central banks to purchase U.S.
Government securities. I understand in 1968 Germany purchased $500
million to help offset cost~s of U.S. troops in that country and Canada
purchased a little more than $1 billion.
Are not special transactions merely forms of window dressing to
achieve an accounting balance and not indicative of underlying U.S.
competitiveness in world markets?
Secretary BARR. Mr. Widnall, I think that in the Economic Report
and in Mr. Deming's statement to this committee it was emphasized
that the United States must not take too much comfort in the fact
that we achieved a balance on both standard,s of accounting, the liquid-
ity measure and the official settlements measure.
24-833 0-69-pt. 1-iO
PAGENO="0146"
142
As you point out, part of the balance was achieved through so-called
special transactions. I will return to them in a seáond. The other part
was achieved, however, for three reasons.
We had a huge inflow of capital into our stock markets, into our
banks and into real estate investments, starting about April or May.
Mr. Widnall, I think no one knows exactly why capital moves from
country to country. We have asked our colleagues in other nations why
this flow occurred, and they gave us three reasons.
No. 1. The U.S. Congress had the courage to raise taxes in an elec-
tion year to cure the huge deficit we were running and demonstrated
to the world that we did possess the courage to enforce fiscal discipline
on ourselves.
No. 2. The disturbances in France caused somewhat of a tremor
throughout the investment world.
And lastly, No. 3, the invasion of Czechoslovakia by Russia seemed
to create a feeling in the wOrld that perhaps Europe was not as safe a~
some had thought.
These were the answers that we received from our colleagues. I can-
not improve on them, sir, and I only submit that a man who buys $10
million generator from Westinghouse or General Electric cannot sell
it immediately. Usually he has to find a buyer. If he buys $10 million
in their stock, he can reverse it in an hour. That is the difference in
the flaws between a surplus in the trade accounts and in the capital
accounts, Mr. Widna.ll.
So I sa.y we cannot take too much comfort from these figures. Al-
though they are accurate, they are accepted as traditional accounting
procedures. The statistics, however, do not always give you the precise
situation.
Now, as to the special transactions. One of the things that has really
troubled me, and Secretary Fowler, and Secretary Dillon, and Mr.
Okun, and his predecessors, Mr. Ackley, and Mr. Heller, all of us, and
before that, the last Republican Secretary of the Treasury, Mr. Robert
Anderson, was the terrible problem of how are we going to meet our
security arrangements in the world? How are we going to keep the
7th Army in Europe as our share of the NATO defense, how are we
going to keep the 6th Fleet in the Mediterranean, with the huge ex-
change costs that they both entail because we pay our troops in dollai~?
These dollars are spent overseas. The dollars are converted into
deutsche marks or French francs or Italian lire which in turn can
become a potential call on our gold reserves.
Now, we have attempted in every way we know to find a way as we
put it, to "neutralize" the foreign exchange impact of these military
deployment expenses. In other words, we are trying to find a way so
that we can do what is proper and right for this country to do in
sharing the military burden of keeping the peace of the world without
bankrupting the international financial reserves of the U.S. Treasury.
One device we have hit on to cover part of the difference between
the cost of our forces and the cost of military equipment other coun-
tries buy here-I do not insist it is the best but it is working at this
time-is the so-called special trai~saction. For example when our forces
spend money in Germany the dollars go to the German Central Bank
and could be put to us for gold. However, the Germans have agreed
PAGENO="0147"
143
to add these dollars to their reserves and not take our gold in exchange
for dollars. What they will do is buy a medium-term U.S. Government
obligation.
Now, I do not contend, Mr. Widnall, that this is the best answer in
the world. I do not think it is as good as if they were neutralizing the
full cost of our troops by buying military equipment as they used to.
But that seems to have been nonnegotiable up to this time.
I submit, Mr. Widnall, youhave hit on one of the most difficult issues
that I know of, and my successor, Mr. Kennedy, is going to be
wrestling with this problem. All of you are going to be wrestling with
it. If you do not find an answer, I guess the only answer is to redeploy-
pullback those troops.
Representative WIDNALL. I understand from your answer that you
are saying that at the present time, we can expect these items to recur
in the near future.
Secretary BARR. Maybe-I would hope that all of you can ponder
and worry about this matter because it is crucial. It is one of the most
difficult issues. It has been attacked by some of the best minds I know
in this country and±~iWbe-frank~to~atlmit~I do not think the answer
is completely satisfactory. It puts us in the position-as one Member
of Congress said to me publicly-of looking as though we are borrow-
ing money from the Germans for the delicious pleasure of protecting
them.
Now, that is putting it in the worst possible light. But it is a light
that a tough politician can put it in, Mr. Widnall. The best light is
that we are fulfilling our military obligations to keep peace in Europe
and we are doing the best we can to prevent the Treasury's financial
resources from being seriously impaired by doing so.
I am sorry this is a long answer, but you hit on a question that really
troubles me.
Representative WIDNALL. I would like to ask you something impor-
tant that goes along with that. Although these bonds are technically
long-term nonliquid securities, is it not true that if either Germany or
Canada found itself in balance-of-payments difficulties we would not
refuse to redeem them?
Secretary BARR. Oh, that is quite correct, sir. There is an agree-
ment we have worked out with them. If their reserves drop, I cannot
remember the precise level, by a certain amount, they can get their
money any time they want.
Representative WIDNALL. Was not the Canadian agreement to buy
certain U.S. Government securities predicated on our exempting
Canada from our controls on capital flows?
Secretary BARR. That is correct, Mr. Widnall. The Canadian situa-
tion is a much better one. I feel good about that. I like the Canadian
arrangement and my only recommendation is that you try to keep it.
Here is the position we are in. It is a political situation really, and
you gentlemen, can understand it better than anyone. We are sitting
here on a continent with a political boundary dividing two nations,
Canada and the United States. Now, in effect, we have one economy.
I hope my friends in Canada are not offended, but you cannot split
the economy. The economy does not pay any attention to the political
boundary.
PAGENO="0148"
144
What we have worked out with the Canadians, Mr. Widnall, is an
arrangement whereby we allow investmei~t, lending, borrowing to flow
pretty freely across the border without restraints under our balance-
of-payments program. The Canadians agreed to make sure that any
U.S. funds that came in would not flow on to other countries and in
that way evade our restraints and that they would put all of the dol-
lars that came into their reserves except those they need for day-to-
day working balances into long-term U.S. securities. This is why we
got the billion-dollar investment from Canada. It will not be the Cana-
dians' intention to build up their reserves by borrowing from us. This
is the best way-this I am very happy with. I would say do not change
it. I do not know of any better way to improve it although it is unique
to Ca.nada. There is not an economic barrier, even though national
boundaries exist between the two countries.
My recommendation is to keep this. If you can improve on the
German offset, do so. I certainly would, and I think there is room for
improvement.
Representative WIr~xALL. Thank you, Mr. Secretary.
Mr. Chairman, my time is up.
Chairman PATMAN. Senator Proxmire?
Senator PROXMIRE. First, I want to compliment you, Secretary
Barr, for your charts on. the comparisons of the budget outlays and
tax function. We have needed this for a long time and I think it under-
lines the importance of our being careful about providing further tax
credits, and so forth, which have a superficial appeal but which really
have the same effect on our budget as expenditures do.
Secretary BARR. That is correct.
,Senator PRox~rIRE. The suggestion that Chairman Mills made, I
think, that we find some way of incorporating this into the budget,
I think is very good.
Secretary BARR. I agree.
Senator PROXMIRE. Very helpful if we had some kind of a separate
budget so we would have them both in the congressional eye.
Secretary BARR. If we had more time I think we might have got it
into the budget. We were a little bit late this year, but I support your
recommendation.
Senator PRox~1IRR. Now, I am very concerned-and except for the
tiiniiig I would have gotten iiito this exchange with Senator Javits-
I am very concerned about what happened to the tax reform package.
In February of last. year Secretary Fowler assured this committee
that we would have the tax reform recommendations in 1968. We did
not get them in 1968. And later on at another time the indication was
if we passed the surtax, it. would come shortly a.fter that. It. did not
come shortly after that, or at all. Now it will come as I understand it,
to the Senate Finance Committee and t.he House Ways and Means
Committee, but not to the Joint Economic Committee.
I hope this is not a precedent because we need that in this commit-
tee. It is very important to this committee. And I hope it will not be.
a precedent with either President Nixon or in 1973 with President
Kennedy. [Laughter.]
If this committee does not have that kind of information it is going
to be very, very difficult for us to serve our purpose which is to advise
the Congress on economic policy.
PAGENO="0149"
145
Secretary BARR. May I respond, Senator? I think you are aware-
at least as I am aware as an ex-member of this club-of the great
dangers in moving on congressional prerogatives. Now, under the
Constitution-and you know I need not tell you how jealously the
House guards this and the Ways and Means Committee guards it-
they have the right to receive tax recommendations and act on them,
sir.
Now, I quite agree that this committee needs this information, and
I have worked out an orderly procedure, as I indicated, with Chair-
man Mills; and the Ways and Means and Finance Committees have
agreed that next week, when Ways and Means is organized, they will
instruct the chairman to request this information from Secretary-
designate Kennedy. He has agreed to transmit it.
Senator PROXMIRE. Well, I understand that.
Secretary BARR. And at that time they will make the committee
print available to all.
Senator PR0xMIRR. What I am saying is I hope this will not be
viewed as taking the Joint Economic Committee out of the action on
tax reform recommendations or anything of the kind in the future.
Secretary BARR. No, sir.
Senator PROXMIRE. We have to have it.
Secretary BARR. May I comment?
Senator PR0xMIRR. And it is just as essential to us as it is to the
Ways and Means or Finance Committee.
Secretary BARR. I agree. I am not sure they do, but I do. [Laughter.]
Representative GRIFFITHS. Mr. Chairman, if you will yield, I do
not know how the Senate Finance Committee got a copy.
Secretary BARR. They do not have a copy. -
Representative GRIFFITHS. Or why they will get a copy. [Laughter.]
Secretary BARR. Well, I will be very candid here. The discussion in
the joint committee was that the proper way to proceed was for the
House to move first. The House is not organized. It was agreed that
the Senate could get it. Senate Finance is an appropriate committee.
But they did agree that in accord with the age-old procedures that
have been followed in this Congress, that the House would move first.
I am satisfied because we have a commitment. I am not going to com-
ment, Mrs. Griffiths, on the procedures of the Congress of the United
States since I am no longer a Member.
Senator PR0XMIRE. Mr. Okun, you speak of the need for fiscal re-
straint. At the same time, you concede the enormous impact of the
defense expenditures. The engine of inflation that you refer to in
my view, is largely fueled by military expenditures and there is evi-
dence that defense programs are loaded with fat. The last year's
Congressional Quarterly-late last year, in November-indicated
that there was $10.8 billion which they felt could be excised from the
defense budget and I thought they made an excellent specific case in
saying just where it ought to come out.
Now, the Economic Report hardly discusses defense expenditures.
In view of its importance, do you not think the Council should analyze
the economics of defense spending?
Mr. Oiiim. Senator Proximire, I think we do take up the economic
impact of defense spending. The very serious problems in the efficiency
of the defense program and the planning of it are, I think, rightfully
PAGENO="0150"
146
in the province of the budget message and the Budget Bureau. I do
not feel that the Council really has the competence to evaluate these
in detail. We did have some
Senator PROXMIRE. You certainly have the only competence in
Govermnent as I see it, to evaluate the economic impact. in detail, to
tell us what defense spending is doing. For instance, yesterday we had
testimony from Assistant Secretary Cha.rles of the Defense Depart-
ment, in which he conceded that there was extraordinary inflation in
those industries in which we have a great deal of defense procurement,
and I am convinced that the principal reason for this extraordinary
inflation is because of the impact of our procurement policies and
practices with the kinds of contracts we have, and so forth. This is
something that seems to me in view of the problem of inflation that
the Council of Economic Advisers should tell us about., explain to us,
give us some recommendations on.
Mr. OKtTN. We do call attention to that in chapter 3 of our Report.1
We speak of the importance of efficiency in procurement practices and
talk about some of the reforms and improvements there. I call your
attention to pages 113 and 114 of the Council's Report.
Senator PR0xMIRE. But at no place do you as I understand it, or
perhaps the Council has and I missed it, recommended fiscal restraints
on the defense budget.
Mr. OKUN. We feel that the estimate of defense expenditures in
the budget has been review~d and is the administration's view on what
a minimum necessary budget is for that purpose. Obviously, any pro-
gram is subject to further refinement and greater efficiency a.nd if that
can be achieved, all to the better. But I think our job has to begin by
taking the figure tha.t my colleague and his staff and the people in
the Defense Department develop, present to the President, get his
approval on it, as the desirable minimum defense needs of the country.
* Senator PROXMIRE. Let. me ask Mr. Zwick: the Subcommittee on
Economy in Government has been holding hearings, Mr. Zwick, on
military procurement, which is the largest single item, as you know,
in the military budget. It. is $40 or $43 billion, depending on precisely
how you define it. Testimony has shown that there is widespread mis-
management and waste and inefficiency in defense purchasing. Mr.
Charles, who some people feel wrote the book in the Air Force area on
procurement, a very competent man, agreed yesterday with what
Admiral R.ickover had estimated-and others-that when we procure
on a noncompetitive basis, we pay 30 to 40 percent more than if we
procure on a competitive basis and, of course, the overwhelming
amount of our procurement is noncompetitive.
Furthermore, Admiral Rickover estimates that at least $2 billion
per year is wasted exclusive of that from procurements because of
high profits. So I would like to ask you this question: Does the Bureau
of the Budget scrutinize the defense budget with the knowledge of
the immense waste in t:his program? [Laughter.]
Mr. ZwIcK. Let me comment several different ways. Let me first
join with all in our interest in efficient government and efficient man-
agement. A major responsibility of the Bureau of the Budget is this
1 "Economic Report of the President, Transmitted to the Congress, 1anuary 1969. To-
gether with the Annual Report of the Coucil of Economic Advisers," available from
Superintendent of Documents, U.S. Government Printing Office, Washington, D.C.
PAGENO="0151"
147
area of management efficiency. Second, let me go directly to the general
charges of waste. They are obviously easy to make. The Congressional
Quarterly study in particular is one that both Secretary Clifford and
I commented on last fall when you asked for our comments on them.
I find a great number of items in which I certainly cannot concur..
It is not only waste we are dealing with, but an issue of national
security.
Senator PROXMIRE. That is why I asked Mr. Okun about the Con-
gressional Quarterly. I would wholeheartedly agree that the Con-
gressional Quarterly recommendations which I support are a matter
of defense strategy in part, although they said that half of their
recommendation was to reduce military personnel which they say was
wasted so badly. They point out, for example, that we have 20 officers
in Vietnam for every command post; that we have the greatest ratio
of logistical supply to supply troops in the history of mankind by
far in Vietnam. But I am asking you about whether or not the defense
budget is scrutinized as carefully as, for example, dollar for dollar,
as the OEO budget and HTJD budget, and so forth.
Mr. ZwICK. This is a replay on our discussion last September.
Defense is a big department. We obviously do not get into as great
detail in that Department as we do in some other departments. This
varies from department to departm~nt~~
The analogy-the counterexample I gave you last September-was
the Post Office. At that time the Postmaster General was about to
close down certain fourth-class post offices because of the Revenue and
Expenditure Control Act employment rollback provision.
I do not try to second guess the Postmaster General as to how to
reduce personnel. Similarly, I do not try to second guess the Joint
Chiefs of Staff as to the need for support personnel in Vietnam. Obvi-
ously, that is related to providing essential equipment to the people
in the field, and we have to think a little bit about effectiveness in
support of our people.
I cannot say to you that we give equal, evenhanded treatment to
all agencies. But I think it is a mistake to say that we treat Defense
in one fashion and all other agencies in another fashion.
Senator PROxMTRE. I will be back. My time is up.
Chairman PATMAN. Mr. Rumsfeld?
Representative RUMSFELD. Mr. Zwick, I would like to turn the con-
versation from a discussion of simply the quantitative approach which
seems to be the focus of much of the material before us, and ask some
questions about the qualitative aspects of some of this.
I notice in one of your budget documents, the smaller one,1 on pages
66 and 67, that you have a budget outlay by function and subfunction.
Mr. ZwIoK. Yes.
Representative RUMSFELD. Now, obviously these subfunctions cut
across different departments and agencies. Some programs that are
tabulated there with dollar figures for fiscal years 1959 through 1970
are in one department, some in another, within the same function. Is
that correct?
Mr. ZwIcK. That is correct.
1 "The Budget in Brief, Fiscal Year 1970," available from the Superintendent of Docu-
ments, U.S. Government Printing Office, Washington, D.C.
PAGENO="0152"
148
Representative RtTNSFELD. Now, to compile that information you
use computers and feed in figures that have come from various agencies
after you have decided which functional category you want to use.
rfllen you ascertain* which activities in each department or agency fit
within that function or subfiInction. Is that rigbt?
Mr. ZwIoK. Yes.
Representative RIJMSFELD. So somewhere you have a list of all the
programs by statute that comprise each one of the aggregate figures
in each function and subfunction. Right?
Mr. ZwIOK. We have all the appropriation accounts classified by
function and subfunction.
Representative RUMSFELD. R.ight. But I mean arranged by func-
tion and subfunction.
Mr. ZwIoK. Yes.
Representative RtTMSFELD. Comumnity development and housing;
education and manpower is another function.
Mr. ZwICK. Yes.
Representative RUMSFELD. Commerce and transportation; natural
resources; right?
Mr. ZwIoK. Right.
Representative RUMSFELD. Now, if you have that material then
you also have material that would indicate what the cost or funding
for each one of those statutory programs might be, regardless of the
department, arranged by function, and so forth.
Mr. ZwIcK. Right; yes.
Representative RUMSFELD. Then, you also have information which
would indicate the units of some kind of a benefit or goal. For example,
if it is housing, the number of housing units. If it is training, the num-
ber of hours of training per person; right?
Mr. ZwIoK. You are, of course, defining the planning, programing,
and budgeting system.
Representative RUMSFELD. Right.
Mr. ZwIcK. I will be happy either to interrupt at this point and
say what we are doing-
Representative R~MSFELD. You ha.ve that?
Mr. ZwIcK. We have attempts at this type of information. Again,
I think it would be unfair to leave the impression that we have some-
where down in the Executive Office nice, neat, benefit-to-cost ratios so
that you can just array all programs and then slice the line at some
point, and "above" they go in and "below" they go out. Let me give
you an example.
Representative RU~ISFELD. No. Let me go on a minute. I want to
make sure I understand exactly what you do and do not have. You
have had this information broken down roughly by the types of people
that benefit, for example, by sex, by age group?
* Mr. ZwIcK. That is right.; in some cases.
Representative R.UMSFELD. By race, by the area. they live in, urban,
suburban, rural, that kind of information. You have all of that?
Mr. ZwIcK. No; I am sorry.
Representative R.UMSFELD. You have part of it?
PAGENO="0153"
149
Mr. ZwIoK. We are making attempts to gather that information. The
certainty with which you are saying this is what is making me nervous.
The concept-
Representative RUMSFELD. The last thing I want to do is make you
nervous at one of your last appearances.
Mr. ZwICK. The concept is fine. The detail and accuracy I still ques-
tion.
Representative RUMSFELD. You talked about all the money you are
going to spend in crime, as I recall, when you were responding to one
of the questions.
Mr. ZWIOK. Right.
Representative RUMSFELD. Do you have a function on crime here?
Mr. ZWICK. We have a new special analysis on crime reduction in
the "Special Analysis" volume of the 1970 Budget. I think again, it
is a very good example of the point you `are making. We thought this
was a very important new cross-cutting look which we ought to take
at the budget.
Representative RUMSFELD. What is the name of that book?
Mr. ZWIOK. "Special Analysis of `the 1970 Budget" ~ have for the
~firattime~an~analysis of crime control programs in theFratG~~rn-
ment, across agencies and by activities within the agencies. Now, again,
that is a preliminary first start. Hopefully, next year it will be better,
and the year after that it will be still better. But certainly we agree in
spirit, I think, with what you are saying.
Representative RUMSFELD. Well now, with regards to the kinds of
data I have just described, what percentag~of input into this system
do you have? In other ~ you, for example, in natural
resources, commerce and transportation, by these broad functions? Do
you have 50 percent of the data you need to present an intelligible anal-
ysis of what we are doing with the taxpayers' money or do you feel we
are down around 30 percent total?
Mr. ZwIcK. The best way I can answer that question is to try to
measure the progress we have made. I do not quite know what the base
is but I know the progress we have made and I am-
Representative RTThISFELD. We started from a very low base.
Mr. ZwIcK. I am quite clear that we have made significant prog-
ress. I think over the last 31/2 years since the planning-programing-
budgeting system has been put in, we have demonstrated to my satis-
faction the applicability of this approach across the Government. In
some areas we have better data; in other areas, poorer data. A com-
posite index that says that it is 58 or 72, I just do not know how to
construct that. You will also find, Mr. Rumsfeld, in this special
analyses volume for the first time, we have a new analysis which
lays out the analytical program structures of the PPB system, the
first time you have it available to the Congress. This analysis shows,
by agency, the program structure and requested appropriations and
other budget authority. It is the very last analysis, starting on page
258, and you will note the first word is "selected," but I think tllat
1 Available from Superintendent of Documents, 11.5. Government Printing Office, Wash-
ington, D.C.
PAGENO="0154"
150
"selected" covers roughly 95 percent of the budget authority, so that
I think I can say we have made substantial progress. I would be less
than candid if I did not say we have got a very, very long way to go
in this area.
Representative RnMSFELD. OK.
Mr. ZWIOK. But the dialog has been improved significantly.
Representative R~rsITr~. You have seen the data so you can make
a judgment as to how far we have to go. I would be curious to know
how far we have to go. You have just described the information
that you have by function and subfunction and you have indicated
you have some of the data, and you do not have some. Taking "natural
resources" as a function, or even as one of these subfunctions, if I
asked you for the kinds of information that you do have, how it
affects people, areas, types of people, and costs and unit benefit, could
you supply that information to this committee?
Mr. ZwIcK. We have worked with all committees. Again, what I
would not like to provide you-let me tell you what I would not want
to provide.
Representative RUMSFELD. Can you provide the data I just asked
for.
Mr. ZWIOK. We would provide all useful data. There are some first
runs on benefit-cost analysis which I do not believe answers all you
want.
Representative R.UMSFELD. I understand that.
Mr. ZWICK. All I am trying to say is what I think is the most-
Representative RnMSFELD. What you think is reasonably accu-
rate-
Mr. ZwIcK. Surely.
Representative RuMSFELD (continuing). You could supply it in the
format that I described?
Mr. ZwIoK. Yes. All agencies work with their appropriations com-
mittees now and given them that sort of informa.tion. So that I do not
think there is any problem.
Again, I went through a similar dialog with Chairman Proxmire
last September. I do not think the problem is information downtown
compared with information uptown. I think the problem is intellec-
tual. We do not understand some of these things. The problem is just
plain hard work. We have got to collect data, clean up data, et cetera.
Representative R~3ISFELD. There is a great deal I do not understand.
Mr. ZWIOK. I think it is really a mistake to think the problem is
what data one side of the Government has and the other side of the
Govermuent does not have. It is just that we have a long way to go in
developing data.
Let. me just give you one very specific example in the manpower
area.
Representative Ru~rsrELD. In a minute a piece of paper is going to
be put in front of me saying my 10 minutes are up, and before that
happens I would like to request that the chairman suggest that your
Bureau, supply the committee with the data that you do have and that
you say you would be happy to make available.
PAGENO="0155"
151
Chairman PATMAN. We have an understanding oftentimes that the
member can submit the question in writing.
Representative RUMSFELD. I do not have a question. I have a request.
Chairman PATMAN. Well, you can get it up and including the
request. And th&-
Representative RUMSFELD. I am making the request. It is a simple
one. I would like to see the data in each of these functions and sub-
functions arrayed the way that you have just described you have it,
supplying only the data you feel is accurate.
Chairman PATMAN. Is that information indicated on a certain page
of a certain document?
Representative RUMSFELD. Only he has the document. We do not
have it. It is not in any of these books he has provided.
Chairman PATMAN. If you could be more specific-
Mr. ZWICK. Mr. Rumsfeld, I first suggest that most of it is in these
documents. You know, the budget document consists this year of six
different items. One, the message and the rest of the budget document
that you normally think of. Two, the special analytic studies-
Representative RUMSFELD. I can count but you-
Mr. Zwicic. And there is-
Representative RUMSFELD. It is not arrayed the way that you just
indicated you have it.
* Chairman PATMAN. Mr. Zwick, will you try to provide that infor-
mation when you look over your transcript of the testimony here?
Mr. ZwIcK. I would be happy to.
Chairman PATMAN. To the best of your knowledge and ability.
Mr. ZwICK. Subject to two constraints. One, it is not easy because
the question of what data is good and what data is bad is a very tough
one and, two, I will not be here after Monday noon. [Laughter.]
So, I want to be quite clear on the question that you are asking and
the cavalier spirit with which I can say surely, we will give you all the
information that we have available. [Laughter.]
Representative RUMSFELD. You are not suggesting that you do not
understand my question.
Mr. ZWICK. I am saying that your statement that it is a simple
question was incorrect. I do not think that is a simple thing to do.
Representative RTJMSFELD. First, I asked you if you had it, and you
said yes, so if you have it I cannot imagine why it would be difficult
for you to supply it.
Mr. ZwIcK. The question is "it" and you qualified "it" as reason-
thle material, not all material, but reasonable material, and that is
the difficult part of it. I am not trying to-
Representative RTJMSFELD. You said you did not want to send out
any information you did not feel was accurate. That is fine. Do not.
Mr. ZWICK. Fine, `but I am saying sorting through-
Representative RUMSFELD. If it ends with *a function for "Natural
Resources" with a blank paper then we will know exactly on what
PAGENO="0156"
152
the Bureau of the Budget feels they have good data. Nothing. And if
it is 50-percent full, we will know that you feel it is 50-percent accurate.
Do you follow me?
Mr. ZwIOK. Yes; I follow you very well.
Representative RUMSFELD. You make the judgment, I do not make
the judgment.
Mr. ZWIGK. I follow you very clearly.
Representative RUMSFELD. There is tha.t slip.
Chairman PATMAN. And if you can supply it, his successor will be
available, I am sure, after Monday.
(The following material was subsequently supplied by the Bureau
of the Budget in response to the suggestion of the Chairman:)
MATERIAL Sr MIT~Et) BY BurGnr DIRECTOR ZWICK
As I indicated during my appearance before the Committee, dollar figures and
reliable program information underlying each function and subfunction used in
the functional classification of the budget are generally available, either in the
budget documents printed by the Bureau of the Budget or in the extensive justi-
fication materials provided by the agencies to the Appropriations Committees of
Congress.
Table 17 of the regular budget document (pages 527-530) summarizes budget
outlays by function and subfunction. Code numbers are shown for each func-
tion and subfunction. Table 14 of the budget (pages 513-524) moves to a greater
level of detail, showing the agencies included under each subfunction. A still
more detailed breakdown is provided in Part 4 of the budget (pages 173-479),
where each appropriation account of the Government is shown, by agency, with
the subfimctional code number identified for each account.
A discussion of the program content of each function is included in the budget
in Part 3, "Federal Activities by Function" (pages 67-171). Part 3 describes,
through text and tables, the programs covered by the budget, classified by func-
tion, including relevant tables and charts on `beneficiaries, workloads, or other
available output measures. Samples of these tables are enclosed as Attachment
A.
Additional information of this type is presented in the Appendix volume of the
budget, and, as noted above, in the agency justification materials.
The Special Analyses volume contains various cross-cutting views of Federal
programs which are more comprehensive than the functional categories and
cover all activities in particular fields, even if the activity has a different primary
purpose. Among the fields covered are education, manpower, health, and crime
reduction.
As in the case of Part 3, these Analyses, through text and tables, portray the
programs involved in each field and-to the extent available-provide data on
numbers and characteristics of the beneficiaries. Samples of tables printed in
the Special Analyses are enclosed as Attachment B.
In the 1970 Special Analysis volume of the budget, a new Analysis is printed
entitled "Selected Agency Budgets by Program Categories." This Analysis, a
copy of which is also enclosea, presents for the first time the budget authority
of most Government agencies classified in terms of the program structures used
in their Planning-Programing-Budgeting (PPB) systems.
As part of the PPB system, staff of the Bureau of the Budget and other execu-
tive branch agencies are using available data on benefits and `beneficiaries of
various programs ,in an attempt to identify the most efficient approaches to
achieving program objectives. As the system progresses, there is every reason to
expect that the agencies will continue their efforts to obtain more reliable data
and improve the methods of measuring the efficiency of alternative means of
reaching specified goals.
PAGENO="0157"
153
ATTACHMENT A
SELECTED TABLES FROM THE BUDGET ACCOUNT
FEDERAL ACTIVITIES BY FUNCTION 75
SUMMARY OF ACTIVE FORCES
Deacription
Actual
E8timated
June 30,
1961
June 30,
1968
June 30,
1969
June 30,
1970
1 ,570
765
307
905
1,534
771
313
869
I ,508
772
315
861
Military personnel (in thousands):
Army 859
Navy 627
MarineCorps 177
Air Force 821
Total, Department of Defense 2,484 3,547 3,487
Selected military forces:
Strategic forces:
Intercontinental ballistic missile squadrons:
Minuteman 20 20
Titan 6 6
Atlas 5
Polaris submarines/missiles (in commission) - - - 5/80 41/656 41/656
Strategic bomber squadrons:
FB-111
B-52 39 34 30
B-58 6 6 6
B-47 80
Manned fighter interceptor squadrons 42 24 19
Bomarc interceptor missile squadrons 7 6 6
Army air defense missile battalions 4936 2034 15
General purpose forces:
Army divisions 11 18 18
Army maneuver battalions 124 218 217
Army aviation units 67 212 235
Army special forces groups 3 7 7
Warships (in commission):
Attack carriers 15 15 15
Antisubmarine warfare carriers 9 8 7
Nuclear attack submarines 13 33 41
Other 328 328 299
Amphibious assault ships (in commission) 110 157 157
Carrier air wings/groups (attack and ASW) - - - - 28 23 21
Marine Corps divisions/aircraft wings 3/3 4/3 4/3
Air Force tactical forces squadrons 93 144 147
Airlift and sealift forces:
Airlift aircraft squadrons:
C-5A
C-130 through C-141 16 44 44
C-118/C-124 and C-7 35 17 12
Troopships, cargo ships, and tankers 101 130 124
Addenda:
Active aircraft inventory (all programs):
Army 5,564 10,465 11,622
Navy 8,793 8,491 8,594
AirForce' 16,905 15,327 15,058
Helicopters included in service aircraft, above 4,047 10, 188 11 ,468
Commissioned ships in fleet (all programs) - - - - - 819 932 906
3,455
20
6
41/656
5
24
6
19
6
1434
18
218
235
7
15
6
47
279
141
20
4/3
138
2
41
7
124
12,018
8,452
14,993
12,014
895
1 Includes aircraft provided for support of allies.
PAGENO="0158"
154
98 THE BUDGET FOR FISCAL YEAR 1970
LOW AND MODERATE INCOME HOUSING PROGRAMS-ADMINISTERED BY
FARMERS HOME ADMINISTRATION
[Estimated units started or acquired. In thousands]
Program
1968
actual
1969
estimate
1970
estimate
Newconstruction
Rehabilitation
Purchase and repair of existing housing
Rural rental housing
Subtotal, new or rehabilitated housing
New or rehabilitated housing with aid from homeownership pro-
gram 1
Subtotal, new or rehabilitated
Purchase of existing housing
Total, housing for low- and moderate-income families
22
3
8
2
35
36
3
6
3
47
1
80
12
7
3
102
10
35
8
48
6
112
8
43
54
120
I Funded by the Department of Housing and Urban Development and included in the community
development and housing function.
116 THE BUDGET FOR FISCAL YEAR 1970
MAIL VOLUME
1965
actual
1966
actual
1967
actual
1968
actual
1969
estimate
1970
estimate
Millions of pieces
Percent increase from previous
year
71, 873
3.2
75, 607
5.2
77, 858
3.0
79,800
2.5
82, 266
3.1
84, 798
3.1
PAGENO="0159"
155
FEDERAL ACTIVITIES BY FUNCTION 119
LOW AND MODERATE INCOME HOUSING
[Estimated units started. In thousandsJ
Program
1968
actual
1969
estimate
1970
estimate
Low rent public housing -
51
75
130
Rent supplements
12
21
20
Rental assistance program
7
84
Homeownership assistance
9
93
Loans for low and moderate income housing (GNMA special
assistance)
44
50
32
Housing for the elderly
7
8
7
Rehabilitation loans and grants
8
16
35
Other housing in rural communities1
Total
35
47
102
157
233
503
1 Funded by the Farmers Home Administration and discussed in the agriculture and agricultural
resources function.
FEDERAL ACTIVITIES BY FUNCTION 133
ELEMENTARY AND SECONDARY EDUCATION PROGRAMS FOR DISADVANTAGED
Program indicator
1968
actual
1969
estimate
1970
estimate
Education of children from low-income families:
Obligations (millions)
Number of children participating (thousands)
Preschool and school classes for the handkapped:
Obligations (millions)
Number of children participating (thousands)
Special bilingual and dropout prevention projects:
Obligations (millions)
Number of children participating (thousands)
Head Start and Follow Through:
Obligations (millions)
Number of children in Head Start programs (thousands):
Full year classes
Summer classes
$1,187
9,000
$14
24
$336
218
477
$1,123
9,000
$29
182
$12
10
$348
218
477
$1,226
9,000
$29
182
$34
35
$398
235
477
Parent and Child Centers
4
4
4
Number of children in Follow Through classes (thousands)
15
31
64
PAGENO="0160"
156
138 THE BUDGET FOR FISCAL YEAR 1970
SELECTED MANPOWER TRAINING PROGRAMS
Program indicator
1968
actual
1969
estimate
1970
estimate
Job Opportunities in the Business Sector (JOBS):
Outlays (millions) $4 $121 $239
Total individuals served (thousands) 33 167 220
Individuals aided with Federal funds (thousands) ` 16 80 160
Percent less than high school graduates 90 92 95
Percentmale 60 75 80
Work Incentive (WIN) program:
Outlays (millions) $90 $163
Number of States participating 38 50
Individuals served (thousands)' 130 175
Percent female 80 80
Children receiving child care (thousands) 50 146
Job Corps:
Outlays (millions) $318 $277 $283
Number of centers 108 113 113
Individuals served (thousands)' 65~ 70 70
Percent less than high school graduates 88 90 92
Concentrated Employment Program (CEP):
Outlays (millions) $71 $163 $193
Areas served 62 82 82
Individuals served (thousands)' 54 105 115
Percent male 48 55 65
Percent less than high school graduates 78 78 78
The number of individuals served is greater than the number of "slots" or "job opportunities"
because several individuals may receive training through a single federally funded position.
PAGENO="0161"
144
157
THE BUDGET FOR FISCAL YEAR 1970
HEALTH RESOURCES
(Dollars in millionsi
Program indicator
1960
actual
1964
actual
1968
actual
1969
estimate
1970
estimate
(1) 535,000
560,000
30,000
17,000
$159
28,000
15,708
$134
580,000
28,000
15,000
$160
(1)
(1)
14,057
$149
(1)
(1)
4,412
$18
(1)
14,834
$142
(1)
(1)
8,106
$35
480,000 510,000 535,000
General hospitals:
Cumulative number of beds meeting
construction standards at end of year_
Total number of beds constructed or
modernized during year
Number of beds aided by Hill-Burton
program during year
Outlays
Long-term care facilities:
Cumulative number of beds meeting
construction standards at end of year
Total number of beds constructed or
modernized during year
Number of beds aided by Hill-Burton
program during year
Outlays
Community mental health centers:
Federally aided centers (cumulative)__
Outlays for:
Construction aid
Staffing support
Population served (millions)
Medical and osteopathy schools:
Number in the Nation
Number federally aided (construction) -
Federal outlays for construction
Physicians and osteopaths:
Total number of students enrolled - -
Number graduated
Number of students receiving Federal
scholarships or loans
Outlays for scholarships and loans - -
Nurses:
Total number of students enrolled... -
Number of students graduated
Number of students receiving Federal
scholarships or loans (1)
Outlays for scholarships and loans - - - (1)
56,000
8,495
$57
331
$12
$24
51
100
10
$41
36,438
8,395
15,582
$19
91 92
55,000
10,000
$49
443
$25
$17
69
104
9
$61
36,900
8,301
16,276
$19
54,000
9,000
$49
556
$44
$38
86
106
15
$85
37,900
8,500
16,688
$19
31,984
7,508
1 ,500
$0.9
33,901
7,690
3,263
$2
115,057 124,744
30,113 35,259
141,948 146,000 150,000
40,000 38,700 39,200
1 Comparable data not available.
(1)
(1)
24,532 27,000
$18 $20
29,000
$24
24-833 0 - 69 - pt. 1 - 11
PAGENO="0162"
158
146 THE BUDGET FOR FISCAL YEAR 1970
SELECTED FEDERAL HEALTH CARE PROGRAMS
[Dollars in millionsi
Program indicator
1960
actual
1964
actual
1968
actual
1969
estimate
1970
estimate
20.5
20.1
4.2
19.1
8.5
$6,851
54
10.2
$5,797
$2,971
20.1
19.8
4.1
18.8
8.2
$6,222
47
9.5
$4,612
$2,384
2.6
$420
$197
4.1
$1,144
$538
Medicare (millions):
Number of aged individuals
Covered by hospital surance.~
Using insurance during the year - -
Covered by insurance for doctor bills
Using insurance during the year - -
Outlays (trust funds)
Medicaid: 1
Number of States and jurisdictions
parUcipating
Number of individuals served (mil-
lions)
Total Federal, State, and local pay-
ment.s
Federal outlays
Maternal and child health:
Crippled children served (thousands)~~
Number of maternity centers
Admissions to maternity centers
(thousands)
Number of youth care centers
Number served at youth care centers
(thousands)
Number of federally aided family plan-
ning participants (thousands)
Outlays
Indians:
Number eligible (thousands)
Admissions to hospitals (thousands) - -
Outpatient visits to hospitals and field
clinics (thousands)
Outlays
Other beneficiaries:
Number eligible (thousands)
Admissions to hospitals (thousands) - -
Outpatient visits to hospitals and field
clinics (millions)
Outlays
372 423
19.8
19.6
3.9
18.2
7.7
$5,332
42
8.6
$3,686
$1,806
485
53
162
58
220
420
$164
390
92
1,575
$84
404
50
1.7
$75
500 500
53 54
187 190
58 59
285 400
850 1,325
$193 $216
404 408
95 96
1,660 1,775
$105 $110
414 418
50 50
1.8 1.9
$82 $80
$38
362
77
1,130
$54
379
52
L2
$50
$58
380
90
1,294
$66
399
51
1.4
$53
1 Numbers prior to 1968 refer to medical assistance for the aged and general medical assistance
provided under public assistance programs.
PAGENO="0163"
159
FEDERAL ACTIVITIES BY FUNCTION
SOCIAL INSURANCE
Program indicator
Number of beneficiaries
(thousands)
Payments I
(millions of dollars)
1968
actual
1969
estimate
1970
estimate
1968
actual
1969
estimate
1970
estimate
Social Security:
Retired workers and their de-
pendents 15,085 15,526 15,951 14,837 16,996 17,715
Disabled workers and their de-
pendents 2,141 2,366 2,524 2,088 2,521 2,658
Survivors of deceased workers - 5,535 5,853 6,185 5,423 6, 191 6,430
Disabled children of retired
and deceased workers 219 232 247 160 194 209
Benefits to noninsured persons
age 72 and over 729 679 598 318 329 282
Railroad Retirement:
Retired workers and their de-
pendents 542 542 541 849 914 922
Disabled workers and their de-
pendents 99 99 99 179 192 194
Survivors of deceased workers.... 315 320 325 326 362 370
Supplemental annuities 34 49 62 25 38 45
Civil Service:
Retired workers and their de-
pendents 432 451 470 1,285 1,418 1,566
Disabled workers and their de-
pendents 174 182 190 380 419 463
Survivors of deceased workers - 260 271 283 291 321 355
Unemployment Insurance:
Workers receiving compensa-
tion:
Unemployed workers insured
under State accounts 4,336 5,000 5,000 2,074 2,210 2,290
Unemployed railroad work-
ers 296 174 170 76 96 93
Unemployed Federal civil
servants 71 71 71 47 49 51
Unemployed ex-s~ervicemen - 148 149 149 58 62 64
I Does not include increases of $1.6 billion in social security benefits and $19 million in railroad
retirement benefits which will result from proposed legislation.
PAGENO="0164"
160
152 ~EE BUDGET FOR FISCAL YEAR 1970
PUBLIC ASSISTANCE
IDollars in millionsi
Program indicator
1968
actual
1969 1
estimate
19701
estimate
Old age assistance:
Average number of recipients (thousands) 2,055 2,099 2,084
Payments to recipients:
Total, Federal, State, and local $1 ,700 $1 ,833 $2,030
Federaishare $1,137 $1,204 $1,308
Aid to the blind:
Average number of recipients (thousands) 82 83 84
Payments to recipients:
Total, Federal, State, and local $89 $92 $99
Federal share $52 $54 $5
Aid to the permanently and totally disabled:
Average number of recipients (thousands) 646 715 785
Payments to recipients:
Total, Federal, State, and local $620 $726 $850
Federal share $367 $434 $499
Aid to families with dependent children: 2
Average number of recipients (thousands):
Families 1,308 1 ,504 1,702
Children 4,013 4,594 5,196
Recipients: Children and adults 5,349 6,146 6,956
Payments to recipients:
Total, Federal, State, and local $2,536 $3,232 $3,944
Federal share $1,395 $1,731 $1,847
Emergency assistance:
Average number of recipients (thousands) 15 37
Payments to recipients:
Total, Federal, State, and local $11 $32
Federal share $6 $16
Total:3
Average number of recipients (thousands) 8,132 9,058 9,955
Payments to recipients:
Total, Federal, State, and local $4,945 $5,894 $6,955
Federal share $2,950 $3,428 $3, 730
1 Includes Federal payments for intermediate care which will amount to $33 million in 1969 and $82
million in 1970. Total Federal, State, and local payments will amount to $61 million in 1969 and $149
million in 1970.
2 Freeze on AFDC caseload assumed in effect as of July 1, 1969.
5 Excludes a reduction of $81 million in outlays which will result from proposed legislation increasing
social security benefits.
PAGENO="0165"
161
FEDERAL ACTIVITIES BY FUNCTION 157
SERVICE-CONNECTED COMPENSATION
Program indicator
1968
actual
1969
estimate
1970
estimate
Veterans:
Disability 30% or less:
Average number of beneficiaries (thousands) 1,437 1 ,441 1,438
Total payments (millions) $606 $624 $641
Average annual payment $422 $433 $446
Disability 40%-100%:
Average number of beneficiaries (thousands) 566 574 582
Total payments (millions) $1,348 $1,460 $1 ,568
Average annual payment $2,382 $2,544 $2,694
Survivors:
Average number of beneficiaries (thousands) 365 369 373
Total payments (millions) $517 $526 $532
Average annual payment $1,416 $1 ,425 $1 ,426
NON-SERVICE-CONNECTED PENSIONS
Program indicator
1968
actual
1969
estimate
1970
estimate
Veterans:
Average number of beneficiaries (thousands)
Total payments (millions)
Percent for pensioners with $1,000 or less outside income
Average annual payment
Survivors:
1,170
$1,272
43.5
$1,088
1,146
$1 ,286
43.8
$1 ,123
1,143
$1,293
44.2
$1,131
Average number of beneficiaries (thousands)
Total payments (millions)
Percent for pensioners with $1,000 or less outside income
Average annual payment
1,049
$779
60.9
$743
1,106
$850
61 .0
$769
1,170
$905
61 .1
$773
PAGENO="0166"
162
158 m~ BUDGET FOR FISCAL YEAR 1970
LIFE INSURANCE
Program indicator
1968
actual
1969
estimate
1970
estimate
Veterans life insurance trust funds:
Number of policies (thousands)
Insurance in force (billions)
Payments to policyholders and beneficiaries (millions)
Veterans life insurance revolving funds:
Number of policies (thousands)
Insurance in force (billions)
Payments to policyholders and beneficiaries (millions)
Serviceniens group life insurance: 1
Number of policies (thousands)
Insurance in force (billions)
Payments to policyholders and beneficiaries (millions)
4,814
$31.2
$846.1
899
$7.5
$37.9
3,800
$37.8
$202.9
4,745
$30.7
$903.1
895
$7.5
$46.1
3,800
$37.8
$217.0
4,664
$29.9
$942.3
888
$7.5
$53.3
3,800
$37.8
$186.0
I Funded under the Department of Defense, in the national defense function.
FEDERAL ACTIVITIES BY FUNCTION 159
EDUCATION AND TRAINING
Program indicator
1968
actual
1969
estimate
1970
estimate
Veterans education and training (GI Bill):
Higher education:
Average number of trainees (thousands)
Payments (millions)
Below college level:
Average number of trainees (thousands)
Payments (millions)
Vocational rehabilitation for disabled veterans:
Average number of trainees (thousands)
Payments (millions) 1
Children of deceased or totally disabled veterans:
Average number of trainees (thousands)
Payments (millions)
Widows of deceased or totally disabled veterans:
Average number of trainees (thousands)
Payments (millions)
169
$335
135
$93
7
$23
17
$38
244
$466
177
$120
10
$31
18
$38
1
$1
289
$513
199
$156
12
$3ff
18
$38
9
$17
I Includes subsistence payments classified under other veterans benefits and services.
PAGENO="0167"
163
162 THE BUDGET FOR FISCAL YEAR 1970
VA HOSPITAL SERVICES
Program indicator
General hospitals
Psychiatric hospitals
1968
actual
1969
esti-
mate
1970
esti-
mate
Percent
change,
1970
over
1969
1968
actual
1969
esti-
mate
1970
esti-
mate
Percent
change,
1970
over
1969
Number of patients treated
(thousands)
Average daily patient load
(thousands)
Estimated length of stay
(days)
Average cost per day of care
(dollars)
Cost per patient treated
(dollars)
Total cost (millions of dol-
lars)
643
54
31
39
1,198
770
652
52
29
43
1,267
827
665
52
28
46
1,320
878
1,9
-.8
-2.7
7.1
4.1
.
6.2
119
44
134
20
2,634
~
314
115
42
.
132
22
2,918
335
110
40
.
132
24
3,122
343
-4.1
-4.1
~
7.0
7.0
2.6
166 THE BUDGET FOR FISCAL YEAR 1970
TREASURY PROGRAMS
[Budget authority in millions]
Program indicator
1968
actual
1969
estimate
1970
estimate
Collection of internal revenue and customs duties
Number of returns processed by Internal Revenue (millions)_
Number of returns examined and disposed of (millions)
Number of formal import entries filed (millions)
Number of persons arriving in United States (millions)
Administration of Government finances
Number of savings-type securities issued (millions)
Number of savings-type securities retired (millions)
Number of checks issued (millions)
Manufacture and distribution of coins, currency, and other fi-
nancial instruments
Currency produced and shipped (billions of pieces)
Coins produced (billions of pieces)
Special law enforcement
Number of investigations and cases completed (thousands) - -
$747.8
107.6
2.9
2.3
213.8
$98.6
130.1
112.7
440.4
$14.2
2.1
5.9
$63.5
149.5
$815.8
110.3
2.7
2.4
225.0
$107.0
144.1
116.8
459.9
$15.2
2.4
5.6
$73. 1
150.0
$867.5
112.8
3.0
2.6
238.0
$110.4
148.2
126.4
472.1
$19.4
2.6
7.5
$86.4
171.6
PAGENO="0168"
164
ATTACHMENT B
SELECTED TABLES FROM SPECIAL ANALYSES VOLUME
SPECIAL ANALYSES 119
Table J-6. NUMBER OF CHILDREN ENROLLED IN PROGRAMS FOR THE
DISADVANTAGED (in thousands)
Federal program
1968
actual
1969
estimate
1970
estimate
Education of children from low-income families
Special classes for the mentally and physically handicapped
Head Start:
Full year
Summer
Parent and Child Centers
Follow Through classes
Dropout prevention projects and classes for children from non-
English-speaking homes
9,000
24
218
477
4
15
9,000
182
218
477
4
31
10
9,000
182
235
477
4
64
35
120 THE BUDGET FOR FISCAL YEAR 19'70
Table J-7. NUMBER OF TEACHERS IN TRAINING OR RETRAINING
Federal program
1968
actual
1969
estimate
1970
estimate
Office of Education:
Education Professions Development Act:
Short-term
23,010
26,580
30,300
Full-year graduate fellowships
Short-term trainees under grants to States
Teachers of the handicapped:
Short-term
3,941
8,938
5,145
9,000
11,184
5,240
9,000
11,184
Full-year graduate fellowships
Civil Rights Educational assistance:
Short-term
4,331
8,468
5,306
8,468
5,173
12,410
Teacher Corps members in service
Subtotal, Office of Education
1 ,873
1,979
2,389
50,561
67,662
75,696
Office of Economic Opportunity: Head Start:
Short-term training
National Science Foundation: Short-term
Total, teachers in training
50,000
44,915
50,000
41 ,613
50,000
41 ,996
145,476
159,275
167,692
PAGENO="0169"
165
SPECIAL ANALYSES
121
Table J-8. NUMBER OF SECONDARY SCHOOL STUDENTS IN
VOCATIONAL EDUCATION (in thousands)
Vocational program
1968
actual
1969
estimate
1970
estimate
Occupational education:
BasicgrantstoStates
Cooperative school employer programs
Exemplary vocational projects
Subtotal, occupational
Homemaking and consumer education
2,775
2,775
2,000
3,300
3,300
2,000
4,150
98
45
4,293
2,000
Table J-9. NUMBER OF CHILDREN PARTICIPATING IN SPECIAL FEDERAL
PROGRAMS (in thousands)
Program
1968
actual
1969
estimate
1970
estimate
Enrolled in overseas dependents schools
Federally "connected" children in "impacted area" schools
Enrolled in Department of the Interior Indian schools
Enrolled in Trust Territory, Guam, and Samoan schools
166
2,564
56
53
191
2,688
58
56
197
2,688
60
61
124 THE BUDGET FOR FISCAL YEAR 1970
Table J-12. NUMBER OF UNDERGRADUATE STUDENTS RECEIVING
STUDENT AID, AND AVERAGE AMOUNT PER RECIPIENT, BY MAJOR
PROGRAM AND STUDENT FAMILY INCOME QUARTILE: 1966-67 (number
of students in thousands; average amount of aid in dollars)
Student aid program
Highest family
income quartile
Lowest family
income quartile
Total, all family
income quartiles
Num-
ber
of stu-
dents
Aver-
age
amount
of aid
Num-
ber
of stu-
dents
Aver-
age
amount
of aid
Num-
her
of stu-
dents
Aver-
age
amount
of aid
State and private aid administered by in-
stitutions
Federally supported student aid:
Work-study
Educational opportunity grants
Veterans benefits
Student loans, NDEA
Guaranteed loans
All student aid programs-estimated
students, unduplicated
Total full-time undergraduate students
in U.S. institutions
Percent undergraduates receiving aid - - -
83
13
4
32
63
159
$169
462
250
990
635
874
231
97
56
20
125
65
$628
1,052
589
990
552
800
660
184
134
157
376
430
$400
826
433
990
588
837
274
847
285
1,477
1,171
1,035
1,940
302
4,058
14
94
29
Source: Adapted from tables 10, A-lB and A-21, Students and buildings. Office of Education'
Planning Document 68-2. May 1968.
PAGENO="0170"
I.
Table J-l4. UNDERGRADUATE STUDENT SUPPORT'
(Outlays in millions of dollars; number of awards in thousands)
Total outlays Grants Loans Work-study
Sublevel and agency
1968 1969 1970 1968 1969 1970 1968 1969 1970 1968 1969 1970 ~
actual estimate estimate actual estimate estimate actual estimate estimate actual estimate estimate
Total 1,059 1,300 1,454 1,062 1,269 1,379 864 1 093 1,221 349 349 344
2-year institutions 245 307 360 298 357 375 172 243 293 56 56 56 ~
Other undergraduate 814 993 1 ,094 764 912 1 ,004 692 850 928 293 293 289
__ __== __ __ __ __ __ __ __ __
Defense 17 18 20 12 14 15
Health, Education, and Welfare:
Office of Education 390 462 530 243 259 309 2 839 2 1 ,066 2 1 ,188 349 349 344 ~
Health Services and Mental Health
Administration and NIH 19 239 25 8 10 12 25 27 33
Social Security Administration 306 368 392 341 381 413
Veterans Administration 323 425 482 3454 601 ~627
Other 5 5 5 4 3 3
_______________ ___ __________ I
0
Involves some duplication because students may be assisted under more than one program.
2 Includes insured loans: 474 thousand in 1968: 690 thousand in 1969; and 850 thousand in 1970.
Total number of individual students aided which differs from the average number of veterans in training during the year used in other references in the 1970 Budget
Note-Number of awards is based on outlays and may not be consistent with data based on budget authority in other parts of the budget.
PAGENO="0171"
Table J-15. GRADUATE STUDENT SUPPORT' (excludes graduate support for elementary and secondary teachers shown on p. 120)
(Outlays in millions of dollars; number of awards in thousands)
Sublevel and agency
Total outlays
Fellowships, traineeships and
other grants
1968 1969 1970 1968 1969 1970 1968 1969
actual estimate estimate actual estimate estimate actual estimate
Total
Graduate and professional
Post-doctoral
Health, Education, and Welfare:
Office of Education
Health Services and Mental Health Administration and NIH
Other
Veterans Administration
National Science Foundation
Other
Loans
396 452 481 213 250 264 106 126
- 315 366 395 203 - 236 251 - 106 126
81 86 86 10 14 13
1970
estimate
49
183
8
118
22
16
50
198
8
154
25
15
133
133
54
207
9
174
25
13
29
81
3
~85
9
6
29
88
3
~118
8
5
0)
30
98
3
~122
8
4
2 106
1 Number of awards may involve some duplication because students may be assisted under more than one program.
2 Includes insured loans: 41 thousand in 1968; 60 thousand in 1969; and 74 thousand in 1970.
Includes AEC. NASA. DOT, HUD. and DOD.
4 Total number of individual students aided which differs from the average number of veterans in training during the year used in other references in the 1970 Budget.
Note.-Number of awards is based on outlays and may not be consistent with data based on budget authority in other parts of the budget.
2 126
2 133
PAGENO="0172"
168
SPECIAL ANALYSES 135
Table K-i. FEDERAL OUTLAYS AND INDIVIDUALS SERVED BY PROGRAM
(dollars in millions, individuals in thousands)
Program
Outlays
Individuals served 1
1964
actual
1968
actual
1969
est.
1970
est.
1964
actual
1968
actual
1969
est.
1970
cot.
Job Opportunities in the Busi-
ness Sector (JOBS)
Concentrated Employment Pro-
gram (CEP)
Work Incentive Program (WIN)
Vocational Rehabilitation
MDTA Institutional and OJT
training
Job Corps
Neighborhood Youth Corps
(NYC) 2
U.S. Employment Service (ES)
Otherprograms
Subtotal
Civilian skill training-Defense_
Grand total
84
98
181
40
4
71
281
321
318
336
312
395
121
163
90
369
338
277
321
341
421
239
193
163
509
330
283
321
378
448
179
78
(3)
21
16
54
335
272
65
538
(3)
242
80
105
130
415
290
70
490
(3)
220
160
115
175
505
290
70
490
(3)
230
403
332
2,038
570
2,441
595
2,864
630
278
(3)
1,522
(3)
1,800
(3)
2,035
(3)
735
2,608
3,036
3,494
278
1,522
1,800
2,035
1 Individuals served for each program are estimated new participants during a fiscal year and
are greater than the number of `slots" or `job opportunities" because several individuals may
receive training through a single federally funded position. Persons served by several programs
are counted only once. Agency data for individuals served by program are not always comparable.
and several of the above entries are derived figures.
2 Amounts for summer programs reported in this analysis are on a calendar year basis.
Data for this program are not comparable to other programs.
SPECIAL ANALYSES 137
Table K-2. INSTITUTIONAL TRAINING PROGRAM LEVELS
(dollar amounts in millions, individuals in thousands)
Program
Outlays
1968 1969 1970
actual est. est.
d
u get
autnority
1970
est.
Individuals served
1968 1969 1970
eat. est. est.
MDTA Institutional Training
Job Corps
WINandCEP
Other
Total
254
318
30
24
268
277
112
24
260
283
171
42
239
280
199
51
147
65
19
27
160
70
80
35
160
70
90
45
626
681
756
769
258
345
365
PAGENO="0173"
169
138 THE BUDGET FOR FISCAL YEAR 1970
Table K-3. ON THE JOB TRAINING PROGRAM LEVELS
(dollar amounts in millions, enrollees thousands)
.
Program
Outlays
1968 1969 1970
actual eat. eat,
Budget
authority
1970
eat.
Individuals served
1968 1969 1970
actual est. est.
JOBS
MDTA Regular OJT
New Careersl
Industry Incentive
Other
Total
4
67
24
6
12
121
70
35
12
63
239
70
38
14
91
420
66
47
20
97
16
125
12
3
26
80
130
15
5
55
160
130
20
10
50
113
301
452
650
182
285
370
1 Includes estimated portion of CEP funding for New Careers.
SPECIAL ANALYSES 139
Table K-4. REHABILITATION PROGRAM LEVELS
(dollar amounts in millions, enrollees in thousands)
Program
Outlays
~
*
1968 1969 1970
actual est. eat,
Budget
authority
1970
eat.
Individuals served
1968 1969 1970
eat. est. eat.
Vocational rehabilitation
Veterans vocational rehabilitation~~.
Total
281
23
369
31
509
38
564
38
335
9
415
15
505
15
304
400
547
602
344
430
520
PAGENO="0174"
170
140 THE BUDGET FOR FISCAL YEAR 1970
Table K-5. WORK SUPPORT PROGRAM LEVELS
(dollar amounts in millions, enrollees in thousands)
Program
Outlays
1968 1969 1970
actual est. est.
Budget
authority
1970
est.
Individuals served
1968 1969 1970
est. est. est.
NYC school and summer 1
NYC out of school
Operation Mainstream
WIN and CEP
Other
Total
193
143
31
25
184
185
136
38
97
121
185
136
38
118
75
188
134
42
134
76
413
125
13
22
165
375
115
15
125
110
375
115
15
170
105
576
577
552
574
738
740
780
I Persons served by both school and summer programs are counted only once.
SPECIAL ANALYSES 143
INDICATORS OF THE LEVEL OF EFFORT
Table K-7. INDIVIDUALS AND MAN-YEARS BY MAJOR APPROACH
(in thousands)
Approach
Individuals served
1968 1970
est. est.
1970
Average
duration
(months)
est.
Man-years
1968 1970
est. est.
On-the-Job Training
Institutional training
Disability rehabilitation
Work Support:
School
Post-school
Total
182
258
344
531
207
370
365
520
475
305
6.3
5.3
12.9
3.4
5.1
53
114
389
241
127
205
170
560
180
140
1,522
2,035
924
1,255
PAGENO="0175"
171
144 THE BUDGET FOR FISCAL YEAR 1970
TABLE K-8. 1970 PARTICIPANT AND MAN-YEAR UNIT COST'
Approach
I
Partici-
Man-year pant
cost est. cost est.
Estimated distribution of
participant cost by percent
Allow-
ances
Educa-
tion and
training
Other
On-the-job training
Institutional training
Disability rehabilitation
Work support:
In-school
Post-school
$2,500
4,750
1 .200
1,550
2,300
$1,300
2,100
1,300
~
450
1,000
14
34
3
85
51
10
31
2
~
2
16
76
35
68
13
33
1 Includes State and local cost sharing.
SPECIAL ANALYSES 145
Table K-9. ESTIMATED CHARACTERISTICS OF GENERAL LABOR FORCE,
ADULT POVERTY POPULATION, AND MANPOWER PROGRAM PAR-
TICIPANTS-(in percent)
Characteristics
Total U.S.
work force
1967
(age 16-64),
civilian, non-
institutional
Poverty
population
1966
(age 16-64).
civilian, non-
institutional
Manpower
programs.
individuals
served 1968
(age 14 and
above) 1
Aged 21 or less
Aged 55 or more
Male
Less than high school education
8th grade education or less
Poor
Welfare recipients
Nonwhite
14
14
63
39
19
11
1
11
22
20
39
(2)
(2)
100
15
35
64
4
57
80
11
86
23
44
1 Agency data are not always comparable and all of the entries are estimates.
2 Not available.
For work force age 18-64.
PAGENO="0176"
146
172
THE BUDGET FOR FISCAL YEAR 1970
Table K-b. ESTIMATED CHARACTERISTICS OF ENROLLEES BY
APPROACH IN 1968-(in percent)
Approach
Poor
Less
than
high
school
Non-
white
21 or
younger
Male
Wel-
fare
recipi-
ent
OJT
Institutional
Rehabilitation
Work support:
In-school
Post school
Total
53
80
68
98
99
50
68
58
98
80
41
63
23
50
52
30
57
22
100
55
68
62
56
56
50
8
19
12
28
45
86
80
44
64
57
23
SPECIAL ANALYSES 151
Table L-2. FEDERAL OUTLAYS FOR HEALTH RESEARCH (in millions of dollars)
1968
actual
1969
estimate
1970
estimate
Basic and targeted research 1,482
Selected targeted research:
Cancerresearch (181)
Cardiovascular research (158)
Mental health research (46)
Neurological diseases and blindness research (113)
Air pollution and environmental research' (63)
Research facilities construction 65
Research, total 1,547
1 417
(155)
(140)
(52)
(95)
(76)
59
1,564
(171)
(153)
(52)
(109)
(90)
75
1,476
1,639
1 HEW only. Estimates for other agencies not available.
Table L-3. FEDERALLY AIDED HEALTH TRAINING AND EDUCATION
Outlays
(sn millions of dollars)
Numbers
(in thousands) 1
1968
1969
1970
1968
1969
1970
Degree or certificate training:
Researchtraining
Physician training
Completing training
Dentist training
Completing training
Nurse training
Completing training
Other health professions training
Completing training
Paramedical training
Completing training
All other training
Total
106
82
15
53
58
8
305
120
112
24
57
71
9
359
118
133
33
56
80
10
381
13.7
26.2
4.3
9.5
2.3
38.9
16.2
14.5
5.3
6.7
19.8
79.4
14.3
31 .5
4.8
10.5
2.4
45.0
18.6
18.8
6.4
9.2
25.3
117.5
13.5
27.1
3.4
9.6
2.1
42.6
16.6
19.5
6.9
9.7
27.6
126.1
626
752
812
236.8
304.3
304.7
1 Numbers in any given year may reflect the Lmpact of expenditures in prior years.
PAGENO="0177"
173
152 THE BUDGET FOR FISCAL YEAR 1970
Table L-4. FEDERALLY AIDED HEALTH PROFESSIONS SCHOOL
CONSTRUCTION
Outlays
(in millions of dollars)
First-year spaces added 1
1968
1969
1970
1968
1969
1970
Medical schools
Dental schools
Other health professions schools~..
Nursing schools
Allied health professionals schools -
Total
43
9
1
8
*
60
15
3
11
*
81
19
4
17
*
450
200
164
1,336
337
279
114
94
1 ,235
400
439
180
149
570
61
89
121
5Less than $500 thousand.
1 Numbers reflect the impact of obligations in given years.
SPECIAL ANALYSES 153
Table L-5. HILL-BURTON PROJECTS APPROVED, COMPLETED, AND IN
OPERATION, JULY 1, 1947-JUNE 30, 1968
-
Type of facility
Total projects approved
Projects completed and in
operation -
Beds
or
(projects)
Cost (millions)
Total Federal
share
Beds
or
(projects)
Cost (millions)
Total Federal
share
Total
General hospitals
Long-term care
Mental hospitals
Tuberculosis hospitals
Diagnostic or treatment centers..
Rehabilitation facilities
Public health centers
State health labs
413, 797
$10, 048
$3, 108
333, 518
$7, 486
$2, 376
305, 310
80,021
21,042
7,424
(927)
(454)
(1, 189)
(38)
7,446
1, 178
247
75
482
327
244
49
2,246
395
78
27
158
107
85
12
250, 923
55, 371
19, 850
7,374
(738)
(360)
(1,084)
(34)
5,657
759
221
74
314
231
190
41
1,759
252
74
27
108
78
69
9
24-833 0 - 69 - pt. 1 - 12
PAGENO="0178"
174
SPECIAL ANALYSES
155
Table L-6. HOSPITAL AND HEALTH FACILITY CONSTRUCTION
Outlays
(in millions of dollars)
Numbers
of beds or (projects) 1
1968
1969
1970
1968
1969
1970
Federally supported construction of
hospitals and other facilities:
General hospitals
Long-term care facilites
Community mental health cen-
ters
Sewer and sanitation facilities~_
Other
Federal hospitals and health facili-
ties:
Hospitals
Nursing homes
Other facilities
Total outlays
138
75
12
80
60
70
5
30
168
71
25
140
25
105
2
59
173
74
44
156
78
144
1
58
15,906
8,495
(62)
2,607
1,709
17,053
10,000
(86)
8,486
662
15,224
9,128
(86)
3,671
470
595
728
1 Numbers in any given year may reflect the impact of expenditures in prior years. and include beds
added, modernized, and replaced.
SPECIAL ANALYSES
Table L-8. PROVISION OF HOSPITAL AND MEDICAL SERVICES
157
Outlays
(in millions of dollars)
Numbers treated
(in thousands)
1968
1969
1970
1968
1969
1970
Provision of direct Federal hospital
and medical services
Inpatients treated
Clinic and physician visits
Payments for hospital and medical
services
Inpatients treated
Clinic and physician visits
Total
2, 738
2,896
2,996
1,905
833
2,031
864
2,095
901
2,240
65,971
2,297
68,969
2,331
71, 361
8,025
9,622
10,981
5,530
2, 496
6,598
3,024
7, 666
3,316
6, 803
(1)
7,345
(1)
7, 686
(1)
10,764
12,518
13,977
1 Not available.
PAGENO="0179"
175
160 THE BUDGET FOR FISCAL YEAR 1970
Table L-9. SELECTED INFANT MORTALITY RATES'
Infant mortality rate per 1,000 live
births
1964
1965
1966
1967
Nationwide
Major cities with maternity and infant care projects:
Baltimore
Chicago
District of Columbia
Houston
New York City
24.8
231.0
230.4
34,5
28.4
226.9
24.7
28.4
33.3
2347
25.0
25.7
23.7
28.0
32.5
35.3
226.4
24.9
22.1
26.8
29.4
32.6
22.1
23.9
1 Years shown are calendar years.
2 Indicates year projects began operation.
162 THE BUDGET FOR FISCAL YEAR 1970
Table L-10. ESTIMATED HEALTH CARE OUTLAYS BY POPULATION AND
INCOME GROUPS (in millions of dollars)
1967
1968
1969
1970
Total,allrecipients
Aged(65andover)
Other adults (19-64)
Children and youth (0-18)
Indigent, total'
Aged (65 and over)
Other adults (19-64)
Children and youth (0-18)
Nonindigent, total
Aged (65 and over)
Other adults (19-64)
Children and youth (0-18)
7,831
10,764
12,518
13,977
4,379
2,535
917
6,619
2,783
1 ,362
7,765
3,105
I ,648
8,677
3,392
1 .907
3,178
4, 122
4,998
5, 791
1 .968
850
360
2, 654
804
664
3, 153
979
866
3,586
1, 149
1,056
4,653
6,642
7,520
8, 186
2,411
1 ,685
577
3,965
1, 979
698
4,612
2, 126
782
5,091
2,243
852
1 Indigency as defined by OEO poverty guidelines.
PAGENO="0180"
I ~
1(
SPECIAL ANALYSES
Table L-12. REPORTED CASES OF SELECTED DISEASES'
165
1960
1964
1967
Red measles
Polio
Whooping cough
Rheumatic fever, acute
Typhoid
441,703
3,190
14,809
9,022
816
458,083
122
13,005
7,491
501
62,705
41
9,718
3,985
396
1 HEW, Morbidity and Mortality, Annual Supplement, Summary, 1967.
166 THE BUDGET FOR FISCAL YEAR 1970
Table L-13. AUTOMOBILE EMISSION CONTROL' (in millions of tons per year)
1966
1967
1968
1969
1970
1971
Auto emissions removed by control devices:
Hydrocarbons
Carbon monoxide
Auto emissions released to the atmosphere:
1
(2)
2
1
3
6
4
11
5
18
7
25
Hydrocarbons
Carbon monoxide
10
62
11
65
11
66
11
67
10
66
10
59
1 Unpublished data furnished by the National Center for Air Pollution Control, HEW.
2 Less than 500 thousand tons.
PAGENO="0181"
177
SPECIAL ANALYSES 167
Table L-14. ESTIMATED OBLIGATIONS FOR FAMILY PLANNING
SERVICES, RESEARCH, AND TRAINING (in millions of dollars)
1968
1969
1970
Health, Education, and Welfare:
ChildrensBureau
6.5
18.5
31.5
Medicaid and public assistance
National Institutesof Health
9.5
8.5
13.0
10.1
17.0
13.6
Health Services and Mental Health Administration
1.2
1. 7
2.4
FoodandDrugAdministration
OfficeofEducation
Total, Health, Education, and Welfare
Office of Economic Opportunity
Departmentof Defense
Total, domestic
Agency for International Development
Departmentof State
Total international
Total estimated family planning obligations
.7
2.8
.8
3.2
1.1
3.5
29.2
47.3
69. 1
9.6
4.0
13.0
4.7
15.0
4.8
42. 7
65.0
88.9
34. 6
.7
49. 7
1.3
50.0
4.1
35. 1
51.0
54.1
78.0
116.0
143.0
PAGENO="0182"
178
SPECIAL ANALYSES 169
Table L-16. FEDERALLY FUNDED HEALTH CENTERS
1968
1969
1970
Total Federal outlays (millions)
Number of centers funded
Number of centers in poverty areas
Number of persons served in year (thousands)
$119.7
502
300
1,125
$191.5
622
352
1~ 742
$245.1
754
415
2,400
Table L-17. FEDERAL OUTLAYS FOR MEDICAL AND HEALTH-RELATED
ACTIVITIES BY CATEGORY (in millions of dollars)
19601
1963
1964
1965
1966
1967
Development of health re-
sources, total
Health research
Training and education - -
Construction of hospitals
and health facilities
Improving the organiza-
tion and delivery of
1,016.9
509.5
217.4
290.0
1,528.9
892. 1
256.5
380.3
1,806. 1
1,069.2
298.4
438.5
1,806.9
1,040. 1
316. 9
449.9
1,955.7
1, 167.3
410.4
378.0
2,430.2
1,363.7
593.6
391.0
health services2
81.9
Provision of hospital and
medical services, totaL
Direct Federal hospital
2, 164.8
2,783.0
2,904.4
2,935.8
3,520.8
7,831. 0~
and medical services_..
Hospital and medical serv-
ices, indirect
1,701.3
463.5
1,877.3
905.7
1,971.4
933.0
2,022.0
913. 8
2, 199.0
1,321.8
2,551.7
5,279.3
Prevention and control of
health problems, totaL..
Total outlays from
325.6
346. 1
392.8
417.6
451.0
539.8
Federal and trust
funds
3,507.3
4,658.0
5,103.3
5,160.3
5,927.5
10,801.0
1 Report of the Committee on Government Operations. U.S. Senate; Coordination of Federal
Agencies' programs in biomedical research and in other scientihc areas." report No. 142. Mar. 30.
1961.
2 Not tabulated in 1960-66 as a separate subcategory.
PAGENO="0183"
179
176 THE BUDGET FOR FISCAL YEAR 1970
Table M-2. INCOME REPLACEMENT PROGRAMS: BENEFIT OUTLAYS
AND BENEFICIARIES, BY PROGRAM
Program
Benefit outlays
(millions)
Number of beneficiaries
(thousands)
1968
actual
1969
est.
1970
est.
1968
actual
1969
est.
1970
est.
Income replacement programs:
Social Security:
OASI $20,737 $23,711 $24,636 21,863 22,597 23,254
DI 2,088 2,434 2,624 2,258 2,441 2,600
Railroad Retirement 1,388, 1,527 1 ,553 1,039 1,045 1,050
Federal employee retirement sys-
tems:
Military 2,095 2,441 2,720 624 695 760
Civil Service 1 ,957 2,158 2,384 866 904 943
Coast Guard 48 52 56 13 14 14
Foreign Service 11 13 15 2 2 2
PHS officers 6 7 10 1 1 1
Judiciary 4 4 4 1 1 1
ESSA officers 1 1 1 t t t
Special annuities (CSC) 1 1 1 1 1 1
Unemployment insurance (in-
cluding compensation for Fed-
eral employees and ex-service-
men) 2,181 ~2,321 2,406 4,555 5,220 5,220
Railroad unemployment 76 97 93 296 174 170
Employees compensation 82 85 87 27 28 28
Veterans programs:
Disability and dependents in-
demnity compensation 2,471 2,610 2,741 2,369 2,385 2,393
Life insurance (Federal funds) - 29 33 36 28 32 35
Life insurance (trust funds)~~ 427 443 457 410 427 440
Other benefits 82 81 84 252 266 278
Proposed legislation 1,519
Total, income replacement
programs 33,684 38,019 41,427 `34,605 136,233 `37,190
Less than 500.
1 Totals include duplication due to program overlap. Estimated unique totals are 31 million, 32
million, and 33 million.
PAGENO="0184"
180
SPECIAL ANALYSES 177
Table M-3~ RETIREMENT BENEFITS: BENEFIT OUTLAYS,
BENEFICIARIES, AND AVERAGE PAYMENTS, BY PROGRAM
Program
Benefit outlays
(millions)
1968 1969 1970
Number of benefici-
aries (thousands)
1968 1969 1970
Average monthly
payments
1968 1969 1970
actual
est.
est.
actual
est.
est.
actual
est.
est.
Retirement benefits:
Social Security
(OASI)
Railroad Retirement
$15,208
969
$17,247
1 ,065
$18,064
1 ,082
16,047
669
16,464
666
16,849
664
$79
121
$87
133
$89
136
Federal employee re-
.
tirement sys-
tems:
Military
Civil Service
1,707
1,285
2,005
1,418
2,244
1,566
499
432
559
451
613
470
285
248
300
262
306
278
Coast Guard
41
45
48
10
10
11
338
356
358
Foreign Service__
PHS officers
10
6
11
7
13
10
1
1
1
1
2
1
609
592
679
607
677
739
Judiciary -
ESSA officers
3
1
3
1
3
1
f
t
t
t
f
t
(2)
730
(2)
787
(2)
817
Special annuities
(CSC)
VA retired officers
1
1
1
1
1
1
71
73
74
pay
Total, retire-
2
2
2
t
t
t
220
226
227
ment benefits
19,233
21,805
23,034
~17, 660
~18, 153
~18, 611
f Less than 500.
I Payments per beneficiary, may differ from payments per retiree.
2 Not available.
Totals include duplication due to program overlap. Estimated unique totals are 17 million,
17 million, and 18 million.
PAGENO="0185"
181
SPECIAL ANALYSES
179
Table M-4. DISABILITY BENEFITS: BENEFIT OUTLAYS, BENEFICIARIES
AND AVERAGE PAYMENTS, BY PROGRAM
Program
Benefit outlays
(millions)
1968 1969 1970
Number of beneficiaries
(thousands)
1968 1969 1970
Average monthly
payments 1
1968 1969 1970
actual
est.
est.
actual
eat.
eat.
actual
eat.
est.
Disability benefits:
Social Security (DI)
Railroad Retirement
$2,088
$2,434
$2,624
2,258
2,441
2,600
$77
$83
$84
(permanent disa-
bility)
Railroad unemploy-
ment (temporary
~lisability)
Federal employee re-
73
34
77
44
78
43
42
88
40
92
39
90
144
2 51
160
2 63
167
(3)
tirementsystems:
Military
Civil Service
380
380
426
419
466
463
119
174
129
182
139
190
266
182
275
192
280
203
CoastGuard
7
8
8
3
3
3
208
216
212
Foreign Servic&__
Employees compen-
sation
1
52
1
54
1
56
t
13
t
14
f
14
750
332
750
321
750
332
Veterans programs:
Disability compen-
sation
1,954
2,084
2,209
2,004
2,015
2,020
81
86
91
Life insurance
(Federal funds) -
Life insurance
3
3
3
5
5
5
(trust funds) ~
Otherbenefits
Total, disability
benefits
20
8
21
8
22
8
38
2
39
1
40
1
5,000
5,579
5,981
~4,746
~4,961
~5,141
Less than 500.
1 Payments per beneficiary, may differ from payments per disability case.
2 Average weekly payments.
Not available.
4 Totals include duplication due to program overlap. Estimated unique totals are about 3 million
for each year.
PAGENO="0186"
182
180 THE BUDGET FOR FISCAL YEAR 1970
Table M-5. SURVIVORS BENEFITS: BENEFIT OUTLAYS, BENEFICIARIES,
AND AVERAGE PAYMENTS, BY PROGRAM
Program
Benefit outlays
(millions)
1968 1969 1970
actual est. est.
Number of beneficiaries
(thousands)
1968 1969 1970
actual est. est.
Average monthly
payments 1
1968
actual
1969
eat.
1970
est.
Survivors benefits:
Social Security
(OASI)
Railroad Retirement_
Federal employee re-
tirement systems:
Military
CivilService
$5,529
347
8
291
$6,464
385
10
321
$6,572
394
10
355
5,816
340
6
260
6,133
352
7
271
6,405
358
8
283
$79
85
107
93
$88
91
108
99
$85
92
109
104
Coast Guard
Foreign Service~~
PHS officers
Judiciary
ESSA officers
Special annuities
(CSC)
Employees compen-
sation
*
1
*
1
*
*
31
*
1
*
1
*
1
31
*
1
*
1
*
1
32
t
t
t
t
t
t
14
t
t
t
t
t
t
14
t
t
f
t
t
t
14
71
250
157
327
(2)
91
183
77
278
151
(2)
(2)
108
186
83
278
153
(2)
(2)
112
188
Veterans programs:
Dependents in-
demnity com-
pensation-
Life insurance
517
526
532
365
369
373
118
119
119
(Federal funds) -
Life insurance
26
30
33
23
27
30
(trust funds)~.
Other benefits
Total, survivors
407
72
422
71
435
74
372
250
388
265
400
277
benefits
7,230
8,263
8,440
~7,446
~7,826
~8,148
* Less than $0.5 million.
f Less than 500.
1 Payments per beneficiary, may differ from payments per surviving family.
2 Not available.
3 Totals include duplication due to program overlap. Estimated unique totals are 6 million, 7
million, and 7 million.
PAGENO="0187"
183
SPECIAL ANALYSES 181
Table M-6. UNEMPLOYMENT BENEFITS: BENEFIT OUTLAYS,
BENEFICIARIES, AND AVERAGE PAYMENTS, BY PROGRAM
Program
Benefit outlays
(millions)
1968 1969 1970
actual est. est.
Number of beneficiaries
(thousands) 1
1968 1969 1970
actual est. est.
Average weekly
payments
1968 1969 1970
actual est. est.
Unemployment bene-
fits:
Workers insured un-
der State laws
Federal employees
and ex-servicemen
Railroad unemploy-
ment
Total, unem-
ploym ent
benefits
$2,074
107
42
$2,210
111
52
$2,290
116
50
4,336
219
233
5,000
220
92
5,000
220
90
$40
44
50
$42
45
62
$44
46
(2)
2,223
2,373
2,456
4,788
5,312
5,310
1 Number of "first claims" paid.
2 Not available.
PAGENO="0188"
184
182 THE BUDGET FOR FISCAL YEAR 1970
Income support programs.-The two major programs which
base benefits on current need are public assistance and veterans pen-
sions.
Table M-7. INCOME SUPPORT PROGRAMS: BENEFIT OUTLAYS, RECIP-
IENTS, AND AVERAGE PAYMENTS, BY PROGRAM AND RECIPIENT
GROUP
Program and
recipient group
Benefit outlays
(millions)
1968 1969 1970
actual eat. est.
Recipients (thousands)
1968 1969 1970
actual est. est.
Average monthly
payments
V
1968 1969 1970
actual est. est.
$1,137
52
367
1,395
$1,204
54
434
1,731
$1,308
59
499
1,847
2,055
82
646
5,349
2,099
83
715
6,146
2,084
84
785
6,965
$69
90
80
40
$71
91
83
44
$76
96
87
48
Income support pro-
grams:
Public assistance
(Federal share):
Old age assistance...
Aid to the blind..
Aid to the perma-
nently and to-
tally disablecL...
Aid to families
with dependent
children
Total, public
assistance
(Federal
share) 2
Total (State and
local share)....
VA pensions:
Veterans
Survivors
Total, VA pen-
sions
Assistance to ref-
ugees
General assistance to
Indians
Proposed legislation....
Total, income sup-
port programs....-
3,052
(1 .996)
3,320
(2,467)
3,719
(3,286)
8,132
9,058
~9,955
1,272
779
1,286
850
1,293
905
1,170
1,049
1,146
1,106
1,143
1,170
91
~62
94
64
94
V
2,051
2,135
2,198
2,219
2,252
2,313
25
9
37
7
49
9
-87
36
21
47
22
62
22
5,137
5,499
5,888 10,408
11,379
12,352
1 Total payments. including State and local contributions where applicable.
2 Categorical financial data are obligations and do not add to total because of collectiors and ad-
justments.
Includes recipients of emergency assistance not itemized above.
PAGENO="0189"
185
SPECIAL ANALYSES 183
Table M-8. AVERAGE MONTHLY PAYMENT LEVELS FOR PUBLIC
ASSISTANCE, BY CATEGORY
Public assistance category
July 1968 payment levels
(per recipient)
National
average
Average
in lowest
State
Average
in highest
State
Old age assistance
Aid to the blind
Aid to the permanently and totally disabled
Aid to families with dependent children
$68.40
91.45
81.80
42.15
$36.00
45.35
44.45
8.50
$107.00
138.85
128.85
71.00
SPECIAL ANALYSES 185
Table M-9. BENEFITS IN KIND: OUTLAYS AND RECIPIENTS FOR
SELECTED PROGRAMS
Type of benefit and program
Outlays (millions) 1
Recipients (thousands) 2
1968
actual
1969
est.
1970
est.
1968
actual
1969
est.
1970
est.
Health care:
Medicaid (Federal outlays)
Medicaid (Total Federal, State, and
local payments)
Food and nutrition:
Food stamps
Child nutrition
Special milk
Removal of surplus commodities
Housing:
Public housing
Rent supplements
$1,806
3,686
187
217
104
385
~290
2
$2,364
4,612
273
246
104
598
3335
14
$2,971
5,797
338
367
15
725
~456
30
8,600
2,488
18,800
17,000
25,500
2,600
43
9,500
3,630
19,400
17,500
26,000
2,800
19
10,200
3,950
22,300
29,000
3,200
445
1 Includes benefits and administrative expenses.
2 Total number of individuals benefited.
Benefits only.
4 Number of households (number of individuals not available).
PAGENO="0190"
186
SPECIAL ANALYSIS R
SELECTED AGENCY BUDGETS
BY PROGRAM CATEGORIES
Reprint of Pages 253 to 273 From
Special Analyses, Budget of the United States, 1970
Detail will not necessarily add to totals because of rounding
BUREAU OF THE BUDGET
January 1969
PAGENO="0191"
187
SPECIAL ANALYSIS It
SELECTED AGENCY BUDGETS BY PROGRAM CATEGORIES
The tabulations shown in this analysis reflect for 3 years-1968,
1969, and 1970-the programs of selected agencies as classified in the
categories and subcategories used in the agency Planning-Programing-
Budgeting (PPB) systems.
While program structures have hitherto been published for most of
the major agencies, this is the first time that data on budget authority
have been presented in these terms. Since all agencies have not reached
an equal stage of PPB development, some executive agencies in the
Federal Government are not covered in this analysis.
THE PPB SYSTEM IN THE FEDERAL GOVERNMENT
Installation of the Planning-Programing-Budgeting system on a
Government-wide basis ~ras initiated by the President in August 1965.
PPB is an effort to promote more systematic use of modern manage-
ment tools that have been demonstrated to be of value in Government.
The PPB approach was employed to enable the Government agencies
and the President to:
o Identify national goals with greater precision and determine which
goals are the most urgent;
o Develop and analyze alternative means of reaching goals most
efficiently;
o Provide information on the total long term systems cost of
programs on a basis that can be related to the benefits derived-
from each program;
~~o-Snt-o~u41-speei44c proposed plans for several yea] ra ead to achieve
stated objectives; and
o Permit better control over programs and budgets by strengthen-
ing measurement and analysis of program performance in relation
to costs.
PROGRESS UNDER THE PLANNING-PROGRAMING-BUDGETING SYSTEM
While the impact of PPB is stifi of modest proportions in the civilian
agencies, its effects are bedoming evident.
o Most major agencies have created a PPB System to carry out
the President's directive. Many of these agencies have dedicated
staff resources specifically to the PPB process.
o These agencies, with only a few exceptions, have established end
purpose-oriented PPB program structures, as ifiustrated in the
tables, enabling them to classify their funds by major program
categories and subcategories. These program structures were used,
in varying degrees, in the decisionmaking process leading to the
budgets for 1968, 1969, and 1970.
o Major program issues are being identified in advance of the time
when budget decisions have to be made and subjected to
systematic analysis.
o The introduction of PPB has provided an impetus toward
increased use of formal analysis in the decisionmaking process.
The development and consideration of alternatives has been
253
PAGENO="0192"
188
254 THE BUDGET FOR FISCAL YEAR 1970
stepped up, both in the programing stage and at the budget de-
cision stage. The emphasis on cost effectiveness analysis as part of
the analytical effort has drawn attention to ways of achieving
given objectives at least cost, or attaining maximum results from
given outlays. Benefit/cost analysis, which had been previously
practiced chiefly in the military agencies and the water resources
field, is now underway on various programs in most major
agencies of Government.
As experience has been gained, the various elements of the PPB
approach and the annual budget process gradually are being more
effectively interrelated, so that the analytical results of PPB are
playing a greater role in decisionmaking for the annual budget.
PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
The following tables for each agency distribute budget authority
by PPB pf~ogram category and, in many cases, by subcategory. In
preparing the 1970 budget, a substantial portion of the budget review
process was carried out in these program structure terms. However,
the budget is presented to and acted upon by Congress in terms of
the appropriation structure as presented in the Budget Appendix.
The amounts showrn by program category and subcategory in this
analysis are derived by distribution of the appropriation totals. This
distribution is only as precise as the underlying agency accounting
system permits. Statistical allocations have been used where necessary
to distribute the appropriation amounts to the program structure.
Not all budgetary items are covered by the program structure. For
example, adjustments to agency budget authority totals for pro-
prietary receipts from the puhlic~ are usually not related to the pro-
gram structure. Each table, however, reconciles the total amounts
shown in program structure terms to total budget authority for the
agency-identifying items excluded, from the program structure and
any necessary adjustments.
Seventeen agencies are covered by this special analysis; they ac-
count for $200.2 bfflion, or 95 percent of the total proposed budget
authority of $210.1 billion for 1970 for the entire Federal Govern-
ment. The budget authority not covered in this analysis is largely
accounted for by numerous smaller agencies, most of which have not
been required to install a PPB system. Many of the agencies not in-
cluded, however, are employing PPB techniques in varying degrees.
DEPARTMENT OF AGRICULTURE
The programs of the Department of Agriculture seek to provide
an adequate supply of food, fiber, and timber; maintain farm income;
improve the nutritional level and protect the health of the entire
population; and promote the continuing development of rural areas.
To achieve these goals the Department performs research, education,
conservation, marketing, regulatory, domestic and foreign food
aid, agricultural adjustment, credit, insurance, national forest manage-
ment and rural development activities.
The program structure shown below consists of a set of subcate-
gories representing the major missions of the Department. The
subcategories are grouped under four major categories representing
the broad unifying goals that provide a focus for the Department's
program planning efforts, and one general support category.
PAGENO="0193"
189
SPECIAL ANALYSES
Income and abundance:
Farm income
Agricultural production capacity
Agricultural marketing and distribution system
Category total
Growing nations-new markets:
Food for Freedom
Export market development
Agricultural development
International agricultural services
Category total
Dimensions for living:
Diets and nutrition
Health and safety
Education and training
Services for living
Category total
Communities of tomorrow:
Community development services
Housing
Public facility and business expansion
Resource protection and environmental improvement
Recreation, wildlife, and natural beauty
Timber
Category total
General support:
General administration
Program support
Category total
Total distributed to programs above
Deductions for offsetting receipts
Total budget authority, Department of Agriculture
DEPARTMENT OF COMMERCE
255
The statutory functions of the Department of Commerce are to
foster, promote, and develop the foreign and domestic commerce and
the manufacturing and shipping industries of the United States.
Related functions include the promotion of area and regional economic
development and performance of Government scientific and technical
activities. These progams are conducted in appropriate relation to
the overall requirements of business and industry as well as to the
broad social and economic objectives of the Nation.
The Department's functions are grouped into eight program
categories as shown in the following table:
Table R-1. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
3,359.1
606.1
108.4
5,358.5
586.6
114.6
4,023.2
496.4
113.4
4,073.7
6,059.7
4,632.9
1,606.6
79.9
6.2
7.2
301.1
88.8
3.5
7.4
1,017.7
28.1
11.5
7.5
1,699.9
400.9
1,064.8
912.0
84.4
21.7
44.5
1,041.8
110.8
22.5
44.9
1,102.7
134.1
235
45.7
1,062.6
1,220.0
1,305.9
29.1
253.0
430.2
245.7
60.7
326.6
31.0
29.7
354.6
215.6
63.6
333.4
40.0
62.6
371.6
204.3
67.9
337.3
1,345.3
1,027.8
1,083.8
4.6
38.8
4.8
39.9
5.1
45.4
43.4
44.7
50.4
8,224.8
-395.4
8,753.2
-415.1
8,137.8
-435.0
7,829.4
8,338.1
7,702.8
24-833 0 - 69 - pt. 1 - 13
PAGENO="0194"
256
190
THE BUDGET FOR FISCAL YEAR 1970
Business development:
International business development
Promotion of travel to the United States
Business assistance
Export control
Foreign direct investment control
Category total
Area and regional development:
Areas
Districts
Urban areas
Special problem areas
Indian areas
Regional development
General administration
Category total
General purpose data production, analysis, and statistical
services:
Data production
National income and product accounts
Statistical assistance and services
Data processing equipment and systems development
Category total
Physical environment:
Weather and marine forecasts and warning services
River and flood prediction and warning services
Earth description, mapping, and charting services
Marine description, mapping, and charting services
Telecommunications and space services
Environmental satellite services
Environmental data services
Research
Retired pay, commissioned officers
Category total
Physical measurements and standards program:
Basic measurements and standards
Materials measurements and standards
Technological measurements and standards
Category total
Marine transportation:
Active foreign trade capability
Research and development
Reserve capability for emergency needs
General support
Table R-2. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
16.4
20.0
28.5
3.0
4.5
6.0
7.8
8.3
8.7
5.4
5.5
5.5
3.7
4.7
32.5
41.9
53.4
156.1
26.0
20.3
17.9
18.4
21.1
19.8
117.0
53.5
16.7
18.4
30.0
26.2
20.4
94.5
84.1
25.0
18.7
31.5
35.7
22.0
279.6
282.2
- 311.5
34.1
2.9
2.6
4.2
42.8
3.1
3.0
.2
167.4
3.3
3.0
.2
43.9
49.1
174.0
77.7
3.9
12.5
18.0
3.6
30.6
4.8
13.6
1.0
83.8
4.1
13.0
19.3
4.2
22.5
5.6
13.3
1.2
90.5
4.6
13.9
20.9
3.9
12.3
5.5
13.8
1.2
165.7
166.9
166.6
11.0
15.8
5.0
31.7
13.1
17.5
5.8
36.4
14.2
18.7
7.2
40.0
364.7
9.4
5.4
14.8
345.8
6.9
5.5
14.2
247.6
11.3
5.4
15.8
Category total
372.4 280.0
PAGENO="0195"
191
SPECIAL ANALYSES 257
Table R-2. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY-Con.
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
Technology:
Intellectual-industrial property protection
State technical services
38.8
6.5
42.5
5.3
46.1
5.8
Information dissemination
3.0
4.3
4.6
Innovation policy and encouragement
Category total
General administration
Total distributed to programs above
Deductionsforoffsettingreceipts
Intragovernmental transactions
Total budget authority, Department of Commerce
.2
.2
.2
48.6
52.4
56.8
4.7
5.2
5.8
1,000.9
-26.3
-4.7
1,006.4
-21.3
-6.8
1 ,088. 1
-21.8
-5.7
969.9
978.3
1 .060.5
DEPARTMENT OF DEFENSE-MILITARY
The military programs of the Department of Defense provide for
the security of the United States. Forces are grouped-regardless of
the branch of military service-according to the national security
missions or programs to be accomplished as shown below:
Table R-3. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category
1968
actual
1969
estimate
1970
estimate
Strategicforces
7,364.5
8,309.6
9,087.4
Generalpurposeforces
Intelligence and communications
31,124.3
5,492.4
29,606.0
5,697.2
29,856.3
5,832.4
Airliftandsealift
1,813.0
1,402.0
1,889.2
Guard and Reserveforces
3,166.0
2,565.5
2,848.6
Research and development
Central supply and maintenance
Training, medical, and other general personnel activities
Administration and associated activities
4,395.4
8, 175.4
9,358.3
1,292. 1
4,598.0
8,662.8
9,481.7
1,404.3
5,500.3
8,848.8
9,967. 8
1,407.3
Support to other nations
Retired pay
Total distributed to programs above
Undistributed nonprogram financing adjustments
Total budget authority, Department of Defense
1,736.8
2,095.0
2,450.7
2,450.0
2,408.8
2,735.0
76,013.0
415.5
76,627.8
-132.9
80,381.8
-144.3
76, 428.5
76,494.9
80,237.5
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192
258 THE BUDGET FOR FISCAL YEAR 1970
DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
The Department has responsibility for the administration of a
broad range of Federal health, education, and welfare programs.
Its programs have been grouped into four program categories and
an overall management category as shown in the table below. Each
program category is further divided into subcategories according
to major purpose.
Table R-4. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
Education:
Development of basic skills
Development of vocational and occupational skills
Development of academic and professional skills
Library and community development
General research (nonallocable research)
General support
Categorytotal
Health:
Development of health resources
Prevention and control of health problems
Provision of health services
General support
Category total
Social and rehabilitation services:
Improving individual capability for self-support
Improving the social functioning of individuals and families
General development of social and rehabilitation resources - - -
Generalsupport
Category total
Income maintenance:
Aged assistance
Disability assistance
Other individual and family support
General support and increasing knowledge
Category total
Executive direction and management (Office of the Secretary) - - - -
Total distributed to programs above
Net deductions for interfund transactions and receipts from the
public not distributed above
Total budget authority, Department of Health, Education,
and Welfare1 44,688.2
2,389.0
2, 289. 3
2, 179.0
269.3
268.3
304. 1
1,330.9
966.2
1,020. 7
87.9
86.8
96.0
25.7
25.6
31.1
35.5
41.3
45.3
4,138.3
3,677.5
3,676.2
2,315.0
457. 1
7,345.7
48.5
2,185.7
480.8
9,980.3
54.9
2,395.6
480. 5
10,739.0
64.4
10, 166.5
12,701.8
13,679.4
408.9
225.7
114.6
32.0
596.4
321.5
127.9
37.7
853.6
399.2
132.6
43.1
781.3
1,083.5
1,428.5
18,476.8
3,207.0
7,755.5
236.4
21,339.4
4,196.6
9,500.6
277.0
24,787.0
4,842.6
10,769.6
327.3
29.675,7
35,313.6
40,726.5
-
24.0
25.0
35.2
44,785.8
-97.5
52,801.5
-964.4
59,545.8
-522.3
51,837.1
1 While the budget authority for the Department of Health, Education, and Welfare agrees with
that shown in the budget document, there may be minor differences in the distribution among
categories and subcategories. These result from some differences in classification of budget authority.
For example, emergency health in Part 3 is classified as National Defense and is therefore excluded
from the health tally in Part 3. It has however been included in the budget authority shown above.
59,023.5
PAGENO="0197"
193
SPECIAL ANALYSES 259
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
The Department has the responsibility for administering the prin-
cipal Federal programs which provide assistance for housing and for
the development of the Nation's communities; assisting the President
in coordination of Federal activities which affect urban community,
suburban, or metropolitan development; encouraging local and
private solution of housing and urban development problems; pro-
motion of interstate, regional, and metropolitan cooperation; and
increasing the effieiency of the private homebuilding and mortgage
lending industries. These activities are grouped below in five major
program categories plus supporting services.
Table R-5. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Assuring decent housing for all Americans:
Assuring an adequate supply of low- and moderate-income
housing
Promoting the efficient functioning of private housing markets -
Category total
Assuring adequate and efficient local public and private facili-
ties and services
Improving the physical environment of urban communities
Improving the social environment of urban communities:
Creating model neighborhoods in demonstration cities
Assuring equal opportunity in access to housing and other
facilities
Category total
Improving management of community development activities:
Improving governmental planning and executive management
of community development
Improving urban information and technical assistance support
to State and local governments
Additional education and training for efficient urban develop-
ment and management
Category total
Improving management of departmental programs and resources:
Research and demonstrations in urban technology
Provide executive direction and general support
Category total
Total distributed to programs above
Intragovernmental transactions and other adjustments, net
Total budget authority, Department of Housing and
Urban Development
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
3,148.3
1,062.9
1,300.8
296.5
746.2
2.5
4,211.2
1,597.3
748.7
402.3
202.8
195.7
850.0
1,062.5
1,112.2
212.0
312.5
4.0
750.0
14.5
212.0
45.0
2.2
3.5
316.5
43.8
3.5
- 764.5
65.0
5.0
9.0
50.7
47.3
79.0
10.0
50.1
18.3
57.0
32.7
74.1
60.1
75.3
106.8
5,786.3
-.5
3,301.7
-58.5
3,006.9
5,785.9 3,243.2 3,006.9
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194
260 Tii~ BUDGET FOR FISCAL YEAR 1970
DEPARTMENT OF THE INTERIOR
The Department of the Interior is concerned with the management,
conservation, and development of the Nation's water, energy,
minerals, fish, wildlife, forest, and outdoor recreation resources. It also
has major responsibilities for Indian and territorial affairs. The
Department's functions are grouped into the following nine major
program categories:
Table R-6. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category
1968
actual
1969
estimate
1970
estimate
Watersupplyandcontrol
Energy production, distribution, and supply
Minerals exploration, production, and supply
Land-forage-timber
Aquatic living commercial resources
Recreationuseandpreservation
Indians
671.7
218.3
42.0
118.7
50.0
366.5
361.4
652.8
209.5
40.2
121.2
49.5
429.0
351.0
667.6
223. 6
41.6
118.3
51.4
422.3
359.4
Territories
58.2
55.8
69.2
Otherprograms
Total distributed to programs above
Deductionsforoffsettingreceipts
Intragovernmental transactions
Total budget authority, Department of the Interior
85.6
93.8
97.5
1,972.4
-1,518.1
-38.9
2,002.9
-1,477.2
-32.0
2,050.8
-1,568.2
415.3
493.7
482.6
DEPARTMENT OF JUSTICE
The chief purposes of the Department of Justice are to provide
means for the enforcement of the Federal laws, including those pertain-
ing to immigration and naturalization; to furnish legal counsel in
Federal cases; to construe the laws under which other departments
act; and to provide assistance to States and localities in law enforce-
mnent. It conducts all suits in the Supreme Court in which the United
States is concerned, supervises the Federal penal institutions, and
investigates and detects violations against Federal laws. It represents
the Government in legal matters generally, rendering legal advice and
opinions, upon request, to the President and to the heads of the execu-
tive departments. The Attorney General supervises and directs the
activities of the U.S. attorneys and marshals ,in the various judicial
districts, and coordinates much of the Federal activity which seeks to
assure civil rights. The Department's programs are grouped into 11
major categories as shown below.
PAGENO="0199"
195
SPECIAL ANALYSES
Reduction of crime:
Organized crime
Interstate crime
Federal crime
Crime prevention
Category total
Law enforcement assistance:
Improvement of State and local law enforcement planning - - -
Improvement of State and local law enforcement operations - -
- Research and development of devices, systems, and procedures
Support to law enforcement personnel for education and
training
General support
Category total
Correction of offenders:
Custody and physical security of offenders
Inmate care and maintenance and operation of institutions.... - -
Rehabilitation of offenders
Assistance to non-Federal correctional systems
Research
General support
Category total 65.8
Control of narcotics and dangerous drug abuse:
Identification of dangerous drugs
Control of traffic in narcotics and dangerous drugs
Treatment of narcotics and dangerous drug offenders
Law enforcement assistance
Public education
Research
General support
Category total
Internal security and governmental integrity:
Integrity of Government personnel
Security of Government, Government programs, and Govern-
ment property
Security of Government international affairs
Identification, exposure, and control of subversive mOvements..
General support
Category total
Civil rights and community relations:
Equal employment opportunity
Housing
Public education
Interference with civil rights
Voting
Federally assisted programs
Public accommodations and facilities
Community relations assistance
261
Table R-7. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
15.1
18.4
20.1
45.4
50.9
52.5
62.8
67.5
69.2
1.3
1.7
1.8
124.6
138.6
143.7
1.7
3.3
.3
25.0
.5
19.0
29.0
3.0
36.4
2.2
20.0
230.0
22.8
49.8
3~8
30.7
89.6
326.3
12.3
38.3
14.1
.2
.9
12.1
37.5
13.7
.4
.8
64.6
14.2
49.1
17.1
2.6
1.1
.9
84.9
6.0
.2
.4
.3
.3
16.5
.9
.2
.1
.9
1.8
.4
20.7
3.3
.4
.4
1.3
2.8
7.0
20.7
29.3
19.6
1.2
.5
26.2
.1
21.6
1.3
.6
28.2
.1
22.3
1.3
.6
28.9
.1
47.6
51.7
53.2
1.7
.4
1.2
11.7
1.4
.4
.6
2.0
2.0
.9
1.4
13.3
1.7
.4
.2
2.3
2.1
1.2
1.6
13.8
1.7
.5
.2
3.7
19.4
22.0
24.8
Category total
PAGENO="0200"
262
196
THE BUDGET FOR FISCAL YEAR 1970
Table R-7. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY-Con.
(in millions of dollars)
Competition in the American economy:
Anticompetitive conduct
Anticompetitive market structures
Governmental intervention and influence
Category total
Legal representation and advice to Federal officers and agencies:
Integrity of the revenue system
Defense of monetary claims
Recovery of money owed the United States
Integrity of administrative action
Land acquisition
Protection and development of natural resources
Category total
Support of the Federal judicial system:
Recommendations of judicial appointments
Facilitation of litigation
Protection of the integrity of the judicial system
General support
Category total
ItiLnigration and naturalization:
Control 0f persons entering the United States
Control of aliens in the United States
Naturalization
Central information record
General support
Category total
General support:
Executive direction
Personnel
Information
Administrative services
Category total
Total distributed to programs above
Deductions for offsetting receipts
Total budget authority, Department of Justice 437.5
DEPARTMENT OF LABOR
The basic goals of the Department of Labor are to increase the
employment and productive potential of the civilian labor force,
particularly the disadvantaged; to minimize the effects of unemploy-
ment by providing income support; and to promote and protect the
rights and interests of all Americans who are actual or potential
members of the work force.
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
4.0
3.2
.9
4.3
3.5
1.0
4.6
3.7
1.1
8.2
8.8
9.4
7.1
5.6
5.1
4.1
2.8
1.2
7.6
6.2
5.9
4.6
3.0
1.4
8.1
6.6
6.4
5.0
3.3
1.6
25.8
28.7
30.9
.1
17.0
1.2
1.1
.1
18.4
1.4
1.2
.1
19.8
1.6
1.3
19.5
21.0
22.8
45.3
25.4
4.5
7.1
4.6
48.0
26.0
4.9
7.4
4.9
50.3
27.1
5.0
8.0
5.0
87.0
91.3
95.4
2.4
.4
.5
2.9
2.5
.5
.7
3.2
3.3
.5
.7
4.2
6.2
6.8
8.7
441.9
-4.4
543.7
-4.6
829.4
-4.6
539.1
824.8
PAGENO="0201"
197
SPECIAL ANALYSES 263
Programs to achieve these overall goals are carried out by the
Departmeri t's constituent bureaus and other organizations under a
variety of subgOals and objectives. At present, the Department's pro-
grams are grouped into six major program categories plus a general
support category as follows:
Table R-8. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Manpower development assistance:
Training
Special manpower programs
Work programs
Research
Policy planning and evaluation
Comprehensive manpower program planning
Information
Manpower management data systems
Administration
Category total
Employment assistance:
Employment market information
Job development and placement services
Employability assistance
Civil rights compliance
Administration
Category total
Income maintenance:
Unemployment insurance
Workmens compensation
Unemployment trust fund (excluding amounts distributed to
other subcategories)
Administration
Category total
Wage and labor standards:
Wages and working conditions
Occupational fatalities and injuries
Utilization of women workers
Research in the area of wage and labor standards
Administration
Category total
Labor-management relations:
Administration of reporting and disclosure laws
Veterans reemployment rights
Labor-management relations assistance
Research and policy development
Administration
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
396.4
412.2
666.3
20.3
15.8
18.0
13.0
5.0
5.0
5.2
2.0
2.4
2.6
34.0
.1
.2
.8
.8
.8
3.5
2.3
2.6
3.0
43~.9
439.0
733.4
18.0
145.6
69.3
1.1
80.8
20.3
143.9
91.0
.9
86.3
21.1
149.2
94.5
.9
90.3
314.9
342.4
356.0
93.0
61.4
3,461.8
13.6
154.5
69.5
3,407.9
20.7
116.9
60.9
3,716.2
21.2
3,629.9
3,652.6
3,915.2
23.3
2.6
.7
2.2
1.6
25.3
2.9
.7
2.2
2.2
25.3
3.4
.8
2.3
2.2
30.4
33.3
34.0
6.6
.8
.3
.3
.6
6.8
1.0
.4
.3
.6
6.9
1.2
.4
.3
.6
8.6
9.0
9.4
Category total
PAGENO="0202"
198
264 THE BUDGET FOR FISCAL YEAR 1970
Table R-8. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY-Con.
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
Data collection, analysis, and dissemination:
Manpower and employment statistics
Prices and living conditions
7.7
3.5
8.2
3.6
8.7
3.7
Wages and industrial relations
Productivity, technology, and growth
Foreign labor and trade
3.5
1 .2
.5
3.6
1.4
.5
3.7
1 .4
.5
Field services
1.2
1.3
1.3
Administration
3.5
3.5
3.6
Revision of the Consumer Price Index
Category total
General support:
Executive direction and management
.6
21.0
22.0
23.5
4.4
4.9
5.1
Legalservices
Internationallaboractivities
Categorytotal
Total distributed to programs above
Deductions for offsettingreceipts
Pay supplemental and other separate transmittal
Total budget authority, Department of Labor
4.8
1.3
5.2
1.4
5.1
1.4
10.6
11.4
11.6
4,455.3
-3.2
4,509.7
-.6
1 .8
5,083.1
-4.1
4,452.1
4,510.9
5,079.0
POST OFFICE DEPARTMENT
The program structure of the Post Office Department is descriptive
of the major functions involved in providing postal services from
the acceptance of mail through delivery and the supporting activities
required to maintain an effective service. Currently, the Depart-
ment's functions are grouped into eight program categories as
shown below.
Table R-9. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category
1968
actual
1969
estimate
1970
estimate
Direct services to mailers
1,273.8
1,400.2
1,438.7
Processing of mail
Delivery services
Transportation
1,453.1
2,053.6
602.9
1,585.8
2,244.4
630.0
1,622.8
2,295.5
645.0
Enforcing postal laws and regulations
Research, development, and engineering
Administrative postal support
Logistical postal support
Total distributed to programs above
Financing adjustments
Postal revenues
24.9
22.1
441.2
764.2
28.2
34.0
522.7
899.1
32.0
50.0
576.2
1,095.9
6,635.8
61.9
-5,505.3
7,344.4
2O~9
-6,287.6
7,756.2
-7,006.4
Total budget authority, Post Office Department
1,192.4 1,036.0 749.8
PAGENO="0203"
199
SPECIAL ANALYSES 265
DEPARTMENT OF TRANSPORTATION
The broad objectives of the Department of Transportation are to:
o Increase economic efficiency through improved transportation;
o Increase safety in transportation;
o Increase the benefits derived from the preservation and enhance-
ment of environmental social values, when impacted by trans-
portation; and
o Support other national objectives, such as national defense and
scientific research.
The objectives of the specific programs of the Department are iden-
tical with, or in support of, these broad departmental objectives. The
Department's programs are grouped into four major program categor-
ies plus a general support category as follows:
Urban transportation:
Highways
Urban mass transit..._
Category total
Interurban transportation:
Highways
Rail
Air
Water
Intermodal
Category total
International transportation:
Highways
Air
Water
Category total
Other national interests:
National security, boundaries, and treaties
Support of science
General transportation safety
Other highway programs
Category total
General support:
Research and development
General highway planning
Administration
Coast Guard retired pay
Category total
Total distributed to programs above
Deductions for offsetting receipts
Intragovernmental transactions
Table R-10. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
1,868.0
2,153.2
168.5
2,171.3
202.0
1,868.0
2,321.7
2,373.3
2,804.0
16.0
679.7
181.6
2.5
3,238.4
18.6
829.3
184.5
2.4
3,281.2
23.3
1,156.8
194.5
2.4
3,683.9
4,273.2
4,658.1
5.0
143.9
59.6
2.0
1.4
58.4
1.4
49.3
208.4
61.8
50.8
93.7
9.4
153.5
129.4
-
90.7
25.8
141.1
104.0
89.1
21.5
177.7
106.5
386.1
361.7
394.8
33.1
54.8
251.2
48.2
37.1
61.9
288.6
52.4
59.5
62.2
318.6
55.7
387.3
440.1
496.1
6,533.7
-19.7
-15.1
7,458.5
-27.8
7,973.0
-20.4
7,430.7
Total budget authority, Department of Transportation -
6,498.9
7,952.6
PAGENO="0204"
200
266 THE BUDGET FOR FISCAL YEAR 1970
DEPARTMENT OF THE TREASURY
The Treasury Department is responsible for the central fiscal opera-
tions of the Federal Government. The Treasury PPB system deals
with the operating elements of the Department, which are funded
mainly through annual appropriations but also receive a substantial
amount of reimbursements and other miscellaneous funds.
The Department's functions are grouped into program categories
as shown in the table. Not included in the PPB structure is interest
on the public debt, which accounts for most of the budget authority
for the Department, and several permanent appropriations which are
aggregated in the adjusting entry in the table.
Table R-ll. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
Administration of Government finances:
Public debt
Issuance, payment, and servicing of Government checks
General activities
Category total
Collection of revenue:
Revenue accounting and processing
Taxpayer assistance and services
Delinquent accounts operation
Delinquent returns operation
Audit of tax returns
Tax fraud investigations-taxpayers in generaL.
Taxpayer appeals
Alcohol and tobacco revenue and regulatory controls
Collection of customs duties
General activities
Category total
Manufacture and distribution of coins, currency, and other finan-
cial instruments
Special law enforcement:
Tax fraud investigations-racketeer segment
Alcohol and firearms investigations
Other investigations
Security responsibilities
General activities
Constructionof facilities
Category total
Policy determination and related activities
Total distributed to programs above
Items not included in the program structure:
Interestonthepublicdebt
Other appropriations not included in the program structure
Deductionsforoffsettingreceipts
Intragovernmental transactions
55.9
37.9
4.8
58.5
43.9
4.6
61.0
44.9
4.5
98.6
107.0
- 110.4
143.6
62.3
78.4
22.4
237.6
27.1
33.2
16.0
78.2
48.9
747.8
151.2
68.7
85.6
23.2
262.4
27.3
35.6
18.0
87.4
56.4
815.8
158.1
69.8
89.4
28.8
281.7
25.9
37.4
19.8
93.3
63.3
867.5
14.2
15.2
19.4
9.5
19.8
26.2
7.9
.1
14.9
22.3
24.7
10.3
.1
.8
17.2
25.9
28.4
12.9
.1
1.9
63.5
7.0
73.1
7.8
86.4
8.5
931.1
14,573.0
312.7
-1,077.2
-82.0
1,018.9
16,000.0
303.0
-978.4
-86.3
1,092.2
16,800.0
278.4
-1,115.2
-81.4
Total budget authority, Treasury Department 14, 657.6 16,257.2
16,974.0
PAGENO="0205"
201
SPECIAL ANALYSES
ATOMIC ENERGY COMMISSION
Procurement and production of source and special nuclear mate-
rials:
Procurement of uranium concentrates
Production of special nuclear materials
Category total
Military applications:
Nuclear weapons
Naval propulsion reactors
Category total
Development of space applications:
Space propulsion
Space electric power
Category total
Development of central station nuclear power:
Converter reactors
Advanced converter and low-gain breeder reactors
High-gain breeder reactors
Desalting applications
General research and development
Category total
Development of other civilian applications:
Merchant ship propulsion reactors
Terrestrial electric power development
Isotopes development
Civilian applications of nuclear explosives
267
The Atomic Energy Commission conducts a variety of production,
research and development, and supporting activities to discharge its
responsibilities for national defense and the peaceful applications of
atomic energy. The agency's functions are grouped into eight major
program categories, as follows:
Table R-12. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
125.5
360.4
104.3
371.1
66.3
361.5
485.8
475.4
427.8
886.8
115.0
1,139.4
128.5
950.4
139.8
1,001.7
1,267.9
1,090.2
72.8
56.1
128.9
59.1
51.7
110.8
55.5
38.8
94.4
24.2
52.0
84.5
2.8
3.4
26.0
31.8
163.2
7.9
3.0
-
19.5
32.8
116.6
5.0
2.8
166.9
231.9
176.7
.1
6.9
8.3
17.9
1.4
4.1
8.5
15.2
4.7
8.1
14.5
- 33.2
- 29.2
27.3
Category total
PAGENO="0206"
202
268 THE BUDGET FOR FISCAL YEAR 1970
Table R-12. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY-Con.
(in millions of dollars)
1967
actual
1968
estimate
1969
estimate
Basic research:
High energy physics research
Other physical research
Biomedical research
Category total
Nuclear science and technology support:
Supporting reactor development activities
Training, education, and information
Category total
General support:
Program direction and administration
Community support
Security investigations
Cost of work for others
Construction planning and design
Category total
Total distributed to programs above
Adjustments to budget authority, net
Total budget authority, Atomic Energy Commission
152.8
175.4
93.2
186.9
214.1
101.9
242.9
184.3
97.9
421 .4
502.9
525.1
114.2
18.0
154.2
17.9
130.2
17.4
132.2
172.1
147.6
95.3
6.4
6.8
14.3
1 .4
108.6
6.8
7.7
31 .3
3.9
114.7
10.1
7.9
13.1
124.2
158.3
145.8
2,494.3
13.9
2,948.5
-377.7
2,634.9
-196.7
2,508.2
2,570.8
2,438.1
GENERAL SERVICES ADMINISTRATION
GSA provides, on a centralized basis where it is efficient to do so,
a variety of goods and services for the agencies of Government.
Among the things provided are: office and other building space,
supplies, automatic data processing equipment, property and stock-
pile management, communications, motor transport, records man-
agement services, and other common services. It also operates the
National Archives and presidential libraries.
GSA's PPB system groups these diversified activities into five basic
program categories to facilitate analyses of costs and effectiveness.
A sixth program category covers agency direction and a variety of
support services.
PAGENO="0207"
203
SPECIAL ANALYSES
Facilities:
Acquisition
Management
Service direction
Category total
Supply services:
Provision of supplies
Supply management
Automated data management services
Service direction
Category total
Other property management and disposal services:
Property management
Real property disposal
Personal property disposal
Program support
Service direction
Category total
Transportation and communications services:
Transportation (other than motor equipment)
Motor equipment
Communications
Public utilities
Service direction
Categorytotal
Records services:
Management
Archival services
Federal Register
Service direction
Category total
Agency direction and support services:
Executive direction
Administrative operations
Allowances and services to former Presidents
Presidential transition
Category total
Total distributed to programs above
Deductions for offsetting receipts
269
Table R-13. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
163.6
94.3
114.7
274.4
288.3
301.7
1.5
1.5
1.6
439.5
384.1
418.0
58,8
1.1
11.6
1.9
65.2
1.2
2.4
2.0
65.2
1.2
2.4
2.0
73.5
70.9
70.8
13.5
4.3
7.4
1.0
.6
13.3
4.5
8.0
1.0
.6
14.4
4.4
8.3
1.0
.6
26.8
27.5
28.8
2.4
.4
1.8
.1
.7
2.4
.4
1.9
.1
.7
2.4
.4
1.9
.1
.7
5.4
5.5
5.5
11.7
4.8
.6
.6
13.1
5.9
.6
.7
13.5
7.0
.7
.7
17.8
20.4
21.9
1.8
12.8
.3
1.9
13.7
.3
.9
1.9
13.8
.4
14.9
16.8
16.2
577.8
-196.8
525.2
-205.9
561.3
-273.9
Total budget authority, General Services Administration 381 .0
319.3 287.4
PAGENO="0208"
204
270 THE flTDGE'r FOR FISCAL YEAR 1970
NATIONAL AERONATJTICS AND SPACE ADMINISTRATION
The principal statutory functions of NASA include conducting
research for the solution of problems of flight within and outside the
earth's atmosphere, conducting activities required for the exploration
of space with manned and unmanned vehicles, and arranging for the
most effective utilization of the scientific and engineering resources of
the United States with other nations that are engaged in aeronautical
and space activities for peaceful purposes.
These functions are reflected in the program structure shown below.
The table shows the NASA budget authority distributed to the
category level except for the general support category which is
shown at the subcategory level.
Table R-14. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
Extension of manned space flight capability
Lunar exploration
Planetary exploration
Astronomy
Space physics
Space biology
Space applications
Space technology
Aircraft technology
Supporting activities:
Tracking and data acquisition
Other supporting activities
Research and program management
Total support activities
Total distributed to programs above
Financing adjustments
Deductions for offsetting receipts
Total budget authority, National Aeronautics and Space
Administration
2,829.7
46.5
109. 1
92.9
73.9
37.5
110.3
237.7
84.6
2, 180.8
13.6
106.8
90. 1
64.4
30.0
105.0
193. 7
94. 9
2, on. 0
22.5
174.6
76.4
62.0
28.0
148.6
198.5
105. 4
275. 9
102.4
639.3
279.7
70.2
- 648.6
298.0
102.1
650.9
1,017.6
998.5
1,051.0
4,639.8
-51.0
-1.5
3, 877.8
117.2
-2. 9
3,878.0
l 17. 5
-3. 0
4,587.3
3,992. 1
3,757.5
PAGENO="0209"
205
SPECIAL ANALYSES 271
VETERANS ADMINISTRATION
The Veterans Administration administers laws authorizing benefits
for former members of the Armed Forces, and for their dependents
and survivors. The agency's functions are grouped into six major
program categories, as follows:
Table R-15. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
1,950.4
2,080.0
2,162.6
515.6
525.2
532.4
16.3
10.2
10.3
37.7
40.7
44.6
2,520.1
2,656.1
2,749.9
1,270.3
778.2
66.9
44.7
1,283.5
848.6
71.0
47.9
1,286.6
904.7
20.2
52.4
2,160.1
2,251.1
2,263.8
378.5
22.8
570.5
31.0
668.6
37.9
33.2
38.5
37.2
45.8
1.4
37.6
46.6
17.4
473.0
685.8
808.1
149.0
701.6
38.7
9.5
40.6
5.7
43.3
889.3
50.1
49.1
Compensation for service-connected disabilities and death:
Compensation for veterans disabilities
Compensation to survivors
Miscellaneous
Administrative support
Category total
Alleviation of financial needs of veterans and survivors not con-
nected with military service:
Veterans pensions
Survivors pensions
Burial allowances and related benefits
Administrative support
Category total
Educational and training assistance:
Readjustmcnt educational assistance to veterans
Rehabilitative training of disabled veterans
Educational assistance to children of deceased and disabled
veterans
Administrative support
Educational assistance to wives and widows
Category total
Housing and other credit assistance:
Credit assistance for homes, farms, and businesses
Servicing and management of loans and properties
Administrative support
Category total
Insurance:
Veterans life insurance trust funds
Veterans life insurance revolving funds
Administrative support
Category total
Health services:
Direct medical care
Medical and prosthetic research
Research and development in health services
Education and training
Medical support and miscellaneous services
Construction of facilities
Category total
Total distributed to programs above
Deductions for offsetting receipts
Intragovernmental transactions
Total budget authority, Veterans Administration
744.7
1.6
18.2
754.3
4.3
19.3
760.4
6.0
21.2
764.6
777.9
787. 5
1,280.3
45.9
4.9
64.1
41.1
56.6
1,369. 1
48.1
50
791
44.7
11.9
1,427.5
59.7
4.8
96.1
49.2
101.4
1,492. 9
1,557.9
1, 738. 7
8,300. 0
~~494Jl~
-5.4
7,978. 9
~483~9~
-6.0
8,397. 1
0~-1-~-~-~-
-5.6
7, 800. 7
7.489. 1
7,911. 4
24-833 0 - 69 - pt. 1 - 14
PAGENO="0210"
206
272 THE BUDGET FOR FISCAL YEAR 1970
NATIONAL SCIENCE FOUNDATION
The fundamental purpose of the National Science Foundation is to
strengthen basic research and education in the sciences. The Founda-
tion's activities are reflected in the program structure shown below.
Table R-16. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Support of scientific research:
Scientific research project support
Specialized research facilities and equipment
National.research programs
National research centers
Category total
National sea grant program
Computing activities in education and research
Institutional support for science
Science education support:
Precollege education in science
Undergraduate education in science._
Graduate education in science
Category total
Science information activities
International cooperative science activities
Planning and policy studies
Program development and management
Total distributed to programs above
Adjustments to budget authority, net -
Deductions for offsetting receipts -
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
170.6
177.3
197.0
18.9
7.0
15.0
15.5
13.0
23.2
31.5
25.7
25.7
236.5
223.0
260.9
5.0
6.0
10.0
22.0
17.0
22.0
83.2
41.0
- 74.0
54.7
21.5
48.7
49.0
20.0
47.1
48.8
20.5
48.2
124.8
116.1
117.5
14.4
11.0
14.0
-
1.4
1.8
2.0
2.4
2.5
2.9
15.4
16.6
17.0
505.2
-10.2
-3.5
435.0
-35.0
-1.1
520.3
-20.3
-1.1
Total budget authority, National Science Foundation~ - - -
491.5 398.9 499.0
PAGENO="0211"
207
SPECIAL ANALYSES 273
OFFICE OF ECONOMIC OPPORTUNITY
The Office of Economic Opportunity contributes to the national
goal of eliminating poverty by aiding in the development of Federal
antipoverty policies and programs and by administering or coordi-
nating various antipoverty program efforts. Achievement of this goal
involves the provision of opportunity for people and communities to
help themselves through work, education, and training in a decent
and dignified environment. Effort to reach these subgoals is carried
out through activities under several major program categories, as
shown in the table.
Employment:
Job training and work experience assistance
Other employment assistance
Category total
Individual and family improvement:
Compensatory and other educational assistance
Health assistance
Other individual and family assistance
Category total
Community betterment:
Resource mobilization assistance
Volunteer assistance
Housing assistance
Legal assistance
Loan assistance
Economic development assistance
Other community betterment assistance
Category total
Poverty research and evaluation
General support:
Executive direction and administration
Coordination and other
Category total
Total distributed to programs above
Deductions for offsetting receipts
Table R-l7. PROGRAM DISTRIBUTION OF BUDGET AUTHORITY
(in millions of dollars)
Program category and subcategory
1968
actual
1969
estimate
1970
estimate
625.6
16.2
752.7
16.5
825. 1
17.0
641.8
769.2
842.1
568.4
60.7
8.3
577.0
95.5
8.8
614.7
127.8
10.8
637.4
681.4
753.3
293.5
29.2
11.9
35.9
17.0
21.6
62.1
294.8
32.0
14.1
42.0
6.0
23.9
66.1
312.2
37,0
24.4
50.0
12.0
48.0
72.0
471.2
478.9
555.6
3.6
3.6
13.0
11.9
1.5
12.5
2.5
12.6
3.4
13.4
15.0
- 16.0
1,767.4
-.5
1,948.0
-.5
2,180.0
-.5
Total budget authority, Office of Economic Opportunity - - 1 ,766.8
1,947.5 2,179.5
PAGENO="0212"
208
Chairman PATMAN. Mr. Boiling of Missouri is recognized.
Representative BOLLING. Mr. Chairman, I really do not have any
questions but I have got a couple of comments.
We have seen two examples at least today of the difficulties that these
gentlemen have faced for their tenure in office, in dealing with an in-
stitution which likes to place all the blame for any misadventure on
the Executive. I cannot understand frankly-and I think I cai~ say
that all of these gentlemen before us are friends of mine-how they
have managed over the years to keep their good humor and even their
sanity in dealing with an institution which, while they themselves
head relative modern institutions in the executive, has not troubled
to modernize itself.
As one-and it is no help to be a Cassandra as most of you have
been-as one who supported publicly a tax increase in January 1966,
I should think that by now the institution to which I belong which
must start all tax measures and the institution to which others on the
committee belong, might recognize that we have not been overwhelm-
ing success in acting in a timely fashion on fiscal matters.
I have been an advocate of a limited authority for the President to
increase and decrease tax rates for so many years I am not quite clear
as to when I first started. And I would like to say categorically that as
an observer wit.h some experience in the House of Representatives,
that the delay in the enactment of a tax increase falls in the lap of
the House of Representatives in particular. It was long delayed there
and it was the House's fault, and plenty of room for plenty of bipar-
tisan complaints because both parties were responsible.
Now, as far as this question of the waste and inefficiency in Defense
are concerned. I think again it might be very, very well if we in the
Congress looked to ourselves because I have some awareness of the
occasional pressures that are brought by regions and areas on the
Defense Establishment and the Executive, and I get a little tired
as a 20-year member of the House of Representatives, of hearing people
criticize the Executive for things that are actually done largely on
the Hill. That is not to say for `a moment that the Executive is perfect.
I do not think so. But I do think that it is time that we began to look
at the place where the greatest difficulty lies.
Mr. Rumsfeld was talking about the need for greater information
and I think Mr. Zwick's reply made `a lot of sense. It is not an adversary
situation because we are not an adversary. I think that we in the House
of Representatives have taken modern methods of storing and re-
trieving information to the extent of installing one computer in the
Clerk's office. I hope the Senate has done better. We are using tech-
niques on the Hill and we pass on the budget just as the administra-
tion submits it, which are not even up to the day of the early Model
"T." And frankly, I compliment you gentlemen for your service. I wish
you well, `and I hope that each one of you separately will tell me how
you kept your sanity and your sense of humor in dealing with the
Congress. [Applause.]
Senator PRox~rIRE (now presiding). Senator Percy?
Secretary BARR. Mr. Boiling, I will speak for all my colleagues.
It has not been difficult.. After all, you know you get harassed a little
bit but when you meet the fellow who has been harassing you at a
cocktail party it seems in the last analysis that you are all pretty good
PAGENO="0213"
209
fellows, you know, and ladies. None of us have bled. We are all in good
health and good spirits.
Senator PROXMIRE. They also get paid more.
Representative BOLLING. That is good, too.
Senator PROXMIRE. I just observed to Mr. Bolling they also are get-
ting paid a lot more than we are.
Senator Percy?
Senator PERCY. Mr. Chairman, I would like to use this occasion to
cypress my appreciation to Secretary Barr for the fine relationship I
have had with him for 2 years. We have agreed completely on the
necessity of a tax increase and I hope I was somewhat helpful in this
regard. We disagreed on the matter of Federal backing of homeown-
ership bonds, but every point of view that I and my colleagues have
had has been given full hearings and I am most appreciative of that.
I understand that this morning there was some discussion of the
balance of payments, particularly with respect to purchase of bonds by
Germany. I attended the NATO parliamentary sessions a couple of
months ago as part of the Senate delegation and it seemed to me, as
we worked on the Economic Committee, that it was a precarious
thing to leave to annual negotiations; for us to go hat-in-hand and to
be subject to the political problems of a country like Germany-when
it might not be a very popular thing for a government to buy our
bonds. It seemed that this is a continuing problem.
It we could adopt as a principle the position that no country should
benefit or lose in a balance of payments sense as a result of its con-
tribution to the mutual defense of the 15 NATO countries, then we
ought to be able to be ingenious enough to create a mechanism for
doing this automatically rather than in these annual negotiations.
I found the 15-member nation body very receptive to the unani-
mously approved resolution that I presented to the Economic Com-
mittee to the effect that such a device be worked out. I was pleased
that the Ministers at their meeting included this section in their re-
port. This would save us about $750 million a year in balance of
payments.
Secretary BARR. In Europe alone.
Senator PERCY. It would get us out of this 41/2 year short-term bond.
They ought to be for 15 or 20 years. There ought to be some sort of
a central bank set up to do this automatically by the purchase of
bonds from the debtor countries, and the sale to surplus countries by
some central bank.
Now, this resolution, has been adopted.
Would you recommend that this be a high item of priority by the
new administration? Is the Treasury Department the right place to
implement this and make all the necessary arrangements?
Secretary BARR. First of all, Senator Percy, I think the country-
I do not want to get too flowery here-and the whole world owes you
and the people working in this area a deep debt of gratitude because
the one thing we have never had to do and the one thing I pray that
Secretary Kennedy does not have to do is go to the Defense Depart-
ment and say we simply do not have the reserves to keep the 7th Army
iii Germany or we are going to have to pull the 6th Fleet out of the
Mediterranean because we do not have the foreign exchange reserves.
PAGENO="0214"
210
It is difficult to brings these things down to where you can explain
them to your constituents, but let me give you something I think all
Americans can understa.nd. This is something I have never told be-
fore, but I think it belongs in this record.
You will remember the days of the financial crisis of last March
when we called our partners in the gold pool to Washington. The
London exchanges closed down. I went over to visit my colleague, Mr.
Nitze, in the Defense Department on Saturday afternoon while we
were still negotiating. He was talking on the phone to Germany and
I could hear somebody yelling on the other end of the line. Nitze said,
"Just a minute. The right man has just walked in." He was speaking
to our commanding general in Germany, I do not know the gentle-
man's name. Well, I will not repeat the words the general was using.
He was talking like a general, I can tell you, but his complaint was
that his troops were out on the streets and when they tried to get a
dollar cashed to buy a beer, the money changers would give than only
85 cents. They would write a check on the post exchange bank, or
wha.tever they have, to pay their rent, and people would not take
their checks.
That is an example of the bind that you can get in-tha.t is the ulti-
mate end of the road, Mr. Percy, and that end is chaos and really it
would be a dreadful blow to world peace. Then you would have
Europe just helpless. It would be helpless. It would be defenseless.
So let me say if we all want to stay alive, peace is the highest prior-
ity. There is no higher priority I know for the new administration.
Now, you have moved with resolution. May I suggest, Mr. Percy,
that you continue to. push, but be tolerant and be helpful, because it
is a long way from a resolution to a specific plan. You will find that
the Finance Ministers of these countries and their Parliaments have
difficulties when they get down to trying to implement the plan. We
have tried several times with all sorts of plans. It is an extremely
difficult thing. I will tell you what happens. A good offset arrange-
ment, Mr. Percy, inevitably gets into their budget.s and they have to
vote to raise taxes and they have to vote to raise expenditures, and I
am sure the committee will agree with me, this is not easy in any
country. That is the nub of the problem.
Maybe you can work it out financially. We have not found any way
out of it except the German offset which I will agree is not completely
satisfactory. The satisfactory way is to do it in the budget through
the appropriation a.nd tax system and that is hard business in any
country-but keep pushing. If you would like, one of the great experts
in this area, one of the deep thinkers, is Mr. Okun, who has puzzled
and worried over this problem as much as anybody I know. Mr. Okun
can supply you a list of people this long-and I will be glad to come in
and give you any political or practical advice I can give.
Secretary Fowler has worked years on t.his. So ha.d Secretary Dil-
lon and Secretary Anderson before him. I just want to tell you the
priority is high; the solution is. difficult. I congratulate you for trying.
Senator Praic~. I very much appreciate your statement on this. I
think you have to strike while the iron is hot. We have a resolution
that has now been approved by the NATO parliamentary group and
by the Ministers and the conditions are favorable right now. But if
we let too much time go by, this opportunity may slip by.
PAGENO="0215"
211
They have directed me to report back in May that steps have been
taken. The initiative will not be taken by any other country. We are
the real benefactor here in the short run. In the long run all NATO
countries are the benefactors because we may some day say we are
quite willing to take the budget impact of this but we can't stand
balance-of-payments impact. And we know the bulk of the spending
is going to be in Europe.
Secretary BARR. That will indeed be correct after the Vietnam con-
ffict is terminated.
Senator Pm~cy. I will send to your office today one suggested pro-
posal. If the Treasury Department can undertake immediately to
consider this proposal, I will then in the transition period take it up
with the incoming Secretary of the Treasury to see if we can't move
forward rapidly and have something concrete to suggest by May when
NATO meets again.
Secretary BARR. May I suggest, Senator Percy, that it is my under-
standing that Prof. Richard Cooper of Yale University, is coming
down to assist Mr. Kissinger in this foreign policy area. It has been
my experience that Professor Cooper-would you agree, Mr. Okun-
has done as much work in this area as anyone. He is young and
imaginative in this area.
Mr. OKUN. A Yale faculty member. [Laughter.]
Secretary BARR. No commercial plugs, please. But I would suggest,
sir, that you are getting the right man. Mr. Kissinger is bringing in
the right man, the best man I know outside of Mr. Okun to attack
this problem.
Senator PERCY. Mr. Chairman, could I make just one last com-
ment? I am very sorry I wasn't here for the full testimony on this
Economic Report. I would just like to register the fact that I am con-
cerned about the new budget. I think there have been some items
slashed out of it that are going to be dangerous in their impact on the
country, one of them being, I think, the whole area of health.
In the President's state of the Union message another program has
been talked about. Yet we have a totally inadequate base for sustaining
the existing programs that we have. We have a lot of work ahead of
us, I think, to look into this to see whether or not the surplus is really
a genuine surplus or whether we have turned the crank awfully tight
and we simply aren't going to be able to live with those figures and
we would be foolish to think that we can~
Secretary BARR. Senator Percy, this budget was peculiar. Most
Presidents, when they are leaving office, don't really agonize about
their last budget because they will not be around to work with
it. President Johnson really did have to agonize on it and all of us
did because we had to have a budget that was responsible and realis-
tic. We also had to try to make our best estimates as to what the Con-
gress would do to these proposals, not' because we are going to be around
to implement them, but because we were recommending that the sur-
tax be extended.
We had to have a credible budget to support the recommendation
that the surtax be extended and a surplus be maintained.
I don't know how well we did, Senator Percy, but we did do our
best to be responsible, to be realistic, and also to try to figure out what
PAGENO="0216"
212
you gentlemen are going to do to that budget down here in the
Congress.
* Mr. ZwIcK. Let me just add two comments, Senator Percy. One;
it is a tight budget, no doubt about that. I think we can demonstrate
that fact in a number of different ways.
Two; there is always the issue of how you set your priorities. I just
would not want to let the record be left without indicating that we did
mcrease significantly health expenditures by 12 percent, and that is
clearly more than the budget on the average went up. Whether 12 per-
cent is enough or too little or too much is a matter of legitimate con-.
cern and debate, but certainly health expenditures did go up in this
budget.
Senator PERCY. Thank you.
Senator PROXMIRE. Mrs. Griffiths?
Representative GRIFFITHS. Thank you very much, Mr. Chairman.
I would like to say to you, Mr. Secretary, that I think one of the
problems of being a high appointive official is that you have first to
convince your friends that you are competent to hold the job-and I
can remember when President Kennedy first put you in the Cabinet,
I thought he had run out of potential appointees rather quickly.
[Laughter.]
At any rate, I would like to say to you today, that you convinced me.
Secretary BARR. Thank you.
Representative GRIrFrms. I think you have done a marvelous job
and I would like to say to you that I treasure as one of the really best
statements ever made by a high appointive official your statement last
year-before, I believe, a Senate committee-that if you gave $5 bil-
lion to Wilbur Cohen, it would take. him quite a little while to spend
it, but if you gave it to the Defense Department, in 2 weeks they
wouldn't know where it has gone. I agree. [Laughter.]
Secretary BARR. That caused me a little trouble, Mrs. Griffiths.
[Laughter.]
Representative GRIFFITH5. I liked it and I agree with it and I think
it took great courage to say it, and I think you were right, absolutely
right. And I notice that in this Economic Report there is a. statement
that total packa.ge procurement, a major procurement innovation of
the 1960's, has extended competition and permitted more fixed-price
contracts.
Well, it is an innovation and it does have a sort of fixed price. But
I would like to show you-Senator Proxmire and I examined one of
these yesterday afternoon-how this thing operates.
The contract extended for 6 years. That is 2 years beyond the term
of a President. That is twice the tour of duty of a military officer in
the Pentagon. That is approximately the tour of duty of a Senator.
It is three times the tour of duty of a Congressman. There will be
nobody with any responsibility for the prices in this contract. Not a.t
all.
This is not the way to go. The way to go is to break these into com-
ponent parts, into simpler items over which someone has some con-
trol ~nd for which somebody has some responsibility.
This type of contract is for all practical purposes a retainer con-
tract to the industry to which it is offered. We will never arrive at the
PAGENO="0217"
21~3
goal toward which I think both you and I would like to strive. That
is to reduce the prices paid in the Defense Department.
Now, they have proved through the years that they really aren't
capable of buying even screws, nuts, and bolts. Time after time it has
been proved that they have paid too much and each time it. has, they
have said, well, of course, that is the ony instance, the only instance.
Now, anybody that knows anything about purchasing knows that
this isn't true. This contract could be repealed, this type of contract
form should be repealed by this Congress if necessary. This contract
is foolish.
I hope the next time you come back, Mr. Secretary, you are made
Secretary of Defense and we cut down on the price they are paying
for these items.
Thank you.
Secretary BARR. Mrs. Griffiths, I have the greatest respect in the
world for you and I think that the Congress and the country took a
great step forward when they put a woman on the tax-writing com-
mittee, but, for goodness' sake, Mrs. Griffiths, don't wish Secretary
of Defense on me. [Laughter.]
I would even prefer to be Secretary of Agriculture first.
[Laughter.]
Senator PROXMIRE. Senator Javits?
Senator JAvITS. There is one thing, Mr. Zwick, that I would like
to ask you. I know you gentlemen have other engagements, so I will
be very brief.
I must apologize for leaving you but we had Ambassador Lodge
before us in the Foreign Relations Committee, and I am sure you will
agree that this was a very urgent priority for all of us.
I gather you took some exception to my feeling that this adminis-
tration had not realy set an order of priorities and pointed to the
trend in the Federal budget outlays to demonstrate that fact.
Now, would you say that there was-that there was some deliberate
decision on priorities, Mr. Zwick, and if so, what was it?
Mr. ZwIoK. Yes. I think there clearly was a deliberate decision on
priorities, and it is reflected in the two charts I discussed earlier, the
6-year budget chart which shows that we doubled our expenditures
on major social programs-or increased them by 123 percent-when
the overall budget went up 67 percent, which clearly reflects a set of
priorities. That 6-year chart is very consistent with the chart which
shows the changes between 1969 and 1970.
Now, I will say two other things very quickly. One, we can all have
an opinion as to whether we have gone far enough, or too far; whether
we have the right amount, the right mix. Obviously, this is a matter of
great difficulty and of diverse opinion. The only point I was really
trying to make is if you look at a special analysis which we have on
"Aid to State and Local Governments," you will find that they have
gone up 150 percent since 1964. They have a big $4.2 billion increase in
fiscal 1970 over 1969.
And we have also shifted dramatically from 55 percent of those aids
going to urban areas in 1964 to 67 percent in the 1970 budget.
Now, it turns out that that happens to be equal to the proportion
of people living in urban areas. And in addition we have Urban De-
PAGENO="0218"
214
velopmeut Bank and other proposals to funnel funds into the urban
area.
Now, I am not saying that therefore all the needs of urban areas
have been met. Far from that, Senator Javits. I am not arguing that
point. I just want the record to show that there has been a `shift toward
urban areas and a concern on the part of this administration for urban
areas, no more than that.
Senator JAVITS. Of course, the big argument about what you say
with respect to this administration has been that expenditures, for ex-
ample, for farm price supports, highways, that is public works, have
continued at a high level during the course of the war, while our urban
problems and needs have not received ~t high enough priority and ade-
quate funds. I would like to ask unanimous consent to include in the
record at this point a recent editorial from the New York Times of
yesterday, January 16, entitled, "Unbalanced Budget Priorities."
Senator PROXMIRE. Without objection, that will be printed in the
record.
(Editorial mentioned follows:)
[From.the New York Times, Jan. 16, 19691
UNBALANCED Bui~irr PRIORITIES
President Johnson's last budget is fiscally balanced, but woefully unbalanced
in terms of social priorities. Government expenditures are likely to be matched
by revenues in the coming fiscal year, a relationship highly desirable for an
`economy gripped by inflation. But too little money is allocated to the cities with
their explosive human problems while too much is funneled into Federal pro-
grams that fulfill less urgent needs-programs with claims based on inertia,
tradition and the political influence of.narrowinterest groups.
In one respect, however, the budget is outstanding. Thanks to the reforms ini-
tiated by President Johnson and formulated under the direction of David M.
Kennedy, Mr. Nixon's Treasury Secretary-designate, the budget for the fiscal
year 1970 is virtually free of the gimmickry that was used to overstate revenues
and understate expenditures in former years. Within the limits inherent in any
attempt to look eighteen months into the economic future, the budget represents
the mostobjective and authentic projection in many years.
Mr. Johnson forecasts a $2.4-billion surplus for the current fiscal year and $3.4-
billion surplus for the year ending June 30, 1970. These estimates are predicated
on such uncertain factors as smaller outlays for farm price supports and the
passage of revenue measures which Congress has in the past rejected. But the
precise size of the surpluses or deficits is of secondary importance in a period
when inflation inevitably distorts both the expenditure and receipt sides of the
budgetary ledger. What is important is that the 1969 and 197D budgets are likely
to be roughly in balance, thus obviating further Treasury borrowing and a more
inflationary monetary policy.
Under the current circumstances-which could be radically altered by success
in negotiating an end of `the war in Vietnam or by changing business conditions-
a `budgetary balance requires the extention of the 10 per cent income tax sur-
charge beyond its June 30 expiration date. Fortunately, both President Johnson
and President-elect Nixonare in essential agreement on this issue.
Defense programs account for more than half of the total of $195.3 billion in
expenditures budgeted for 1970. Because of the bombing halt and fewer heavy
construction projects, outlays for the war in Vietnam are expected to decline by
$3.5 billion. But over-all defense outlays will go up anyway. Included in the $5
billion of increases outside of Vietnam ate more funds for the productioq and
deployment of the Sentinel antiballistic missile system. That project is supposed
to provide a defense against a possible Chinese attack, but its more certain and
disquieting impact will be an escalation of the nuclear arms race with the Soviet
Union. Funds which are freed by virtue of a cessation of hostilities in Vietnam
should be `transferred to urban renewal and antipoverty programs, not siphoned
off for military hardware that will actually increase American insecurity by
spurring a new competition in instruments of mass destruction.
PAGENO="0219"
215
The imbalance in the setting of national priorities is not limited to the defense
budget. Two~thirds of all Americans live in urban areas, and in recent years
urban areas accounted for more than 80 percent of. the national population
growth. Yet those facts of life find no rational reflection in the budget. The total
outlays for "community development and housing"-a group of programs that
encompasses urban renewal-are estimated at $2.3 billion in fiscal 1969 and less
than $2.8 billion in 1970. In the same years the expenditures on "farm income
stabiliz'ation"-the farm price-support programs that raise the cost of food and
clothing to :the poor-are estimated at $4.5 and $3.9 billion respectively. A visitor
from outer space might read the budget and conclude that ours is still a rural
society.
Among the other misallocations are the $219 million to be spent in the year
ahead on the supersonic air transport and the nearly $9 billion for highways.
Neither sum is justified when outlays for urban mass transportation are limited
to $400 million.
It is commonplace to point to political obstacles whenever it is suggested that
radical changes in budgetary priorities are required. But unless those barriers
are surmounted, the social imbalance in the Federal budget will have even more
disruptive consequences than would a lack of control on the fiscal side. The
test for the incoming Nixon Administration will be to reorder the priorities and
address `itself at once to the ill-met needs of the cities.
Mr. ZwIoK. May I just make one comment. On farm price supports,
for example, I did a calculation last year on the 1967, 196S, and 1969
budgets. If you take the three last Eisenhower budgets, and the 1967,
1968, and 1969 budgets, you will find that the growth in those pro-
grams was much smaller than the tremendous growth in the social and
urban programs.
I am still not saying that is necessarily the right mix. I am just
saying there have been shifts and I thought that New York Times edi-
torial missed that point. Obviously, they haven't had a chance to
read the special analyses.
(The following was later submitted by the Budget Director:)
With the approval of the Joint Economic Committee, I would like to have
inserted in the record the following letter, which I have sent to the Editor of
the New York Times concerning the editorial of January 16 entitled "Unbalanced
Budget Priorities."
BUREAU OF THE BUDGET,
OFFICE OF THE BUDGET DIRECTOR,
January 18, 1969.
THE EDITOR,
The New York Times,
New York, N.Y.
SIR: I was dismayed by the inaccuracies and lack of sophistication in your
lead editorial of January 16, entitled "Unbalanced Budget Priorities."
My heart was warmed-as would any Budget Director's be-by your assess-
ment that President Johnson's 1970 budget "represents the most objective and
authentic projection in many years." And, of course, there are always under-
standable differences in judgment. But the readers of the Times have the right to
expect the same accuracy on the editorial page as they have become accustomed
to on the news pages. Most of the judgments in this editorial are based on care-
less disregard for readily available facts in articles that appear elsewhere in the
very same edition of the Times.
The editorial focused on the amount of resources which the Federal Govern-
ment is channeling to urban areas. The President's Budget Message contains an
entire section labeled "Aids to Urban Areas," reprinted in the same edition of the
Times on page 20. However, the editorial writer appears to have read only the
first paragraph.
After reporting correctly that the number of people living in metropolitan
areas is almost two-thirds of our population and `that more than 80% of our
population growth between 1960 and 1966 did occur in such areas, the quality of
reporting deteriorates. Outlays for the functional grouping "community devel-
opment and housing," as used in the editorial, clearly fall short of all Govern-
PAGENO="0220"
216
ment outlays to aid urban areas. Federal aid to State and local governments-
the direct flow of resources between governments-has channeled a rising share
of funds to meet the needs of the city. Quoting from the President's Message, as
reported on page 20 of the Times: "In 1964 we spent an estimated $5.6 billion, or
55% of total Federal grants in such areas. The 1970 budget provides $16.7 billion
for aid in metropolitan areas, about 67% of total Federal grants." This repre-
sents almost a tripling in only six years, with the increase alone greater than the
total aid to urban areas in 1964. Let me repeat that this is only the most easily
measured flow of "aid," and does not count direct Federal spending or payments
to individuals.
The implications of the editorial are doubly unfortunate in a year in which
the budget will provide for a start on more than 500,000 housing units for families
with low incomes-more than triple the number started last year. Beyond that,
the budget includes President Johnson's proposal of an Urban Development Bank,
to channel more private and other governmental resources into badly needed
community facilities. Even in a very tight budget, Model Cities grants increase
more than $475 million, and urban renewal outlays rise by over $175 million.
Advance appropriations sought for each of these programs in 1971 will be $1.25
billion. These facts and others are stated quite clearly in the Budget Message.
This is not to argue that we should be sanguine about our efforts to meet the
urgent needs of our cities. As President Johnson said in his State of the Union
Message, a great deal of what we have committed needs additional funding. The
question is one of what ca*i~ be done. Viewed in this light, I believe the 1970
budget is both attainable and a further step in the direction President Johnson
has set in the six budgets he has submitted to Congress. A basic emphasis in
all of these budgets has been on social-especially urban-problems.
CHARLES J. Zwicx, Director.
Senator JAVITS. Well, I shall read it and we will have other wit-
nesses before us. I am rather hopeful, Mr. Chairman, when we get the
Economic Report of this administration with Dr. McCracken as the
Chairman, that you gentlemen will be available to testify because I
t.hink that the country can profit enormously, Mr. Chairman. These
gentlemen will appear in their own private capacity at that point.
I hope very much that they will agree to do that because I think it
would~ be extremely important to the Nation to have the addition of
debate if any debate is occasioned, or if it is not, so much the better,
to have the forfification of support so that we may know what the
former chief fiscal officers of the Government believe about the same
set of figures and the same set of facts upon which the new fellows will
be commenting.
Senator PROXMIRE. Senator Javits, I think that is an excellent sug-
gestion. I certainly favor it and support it and, of course, it will be
up to Chairman Patman, but I will support you on that
enthusiastically.
Senator JAVITS. I really think you could help the country enor-
mously if you could allow us to have that leave.
I have just one other point about the Urban Development Bank.
I have made myself the proposal, and I have the legislation, for a
"Domestic Development Bank." Can any of you tell us, perhaps you
Mr. Zwick, as you mentioned it, whether there is any fundamental
conceptual difference between the administration's proposal and my
own. The name is immaterial. I just wondered whether he had some-
thing else in mind.
Mr. ZwIoK. I am not completely familiar with your proposal except
in general terms. I think they are quite consistent, but-
Senator JAVITS. Quite consistent.
Mr. Zwicii (continuing). But I would have to sit down and exam-
ine it item by item.
PAGENO="0221"
217
Senator JAVITS. The reason I asked that, because it happens to be
critically important, not because I have proposed it but because Presi-
dent Nixon has endorsed it. [Laughter.]
Secretary BARR. Senator Javits, i~s this the plan in which you were
joined by Senator Goodell and Mr. Widnall and others?
Senator JAvrrs. That incorporates it. That is the Community Self-
Determination Act and incorporates the Domestic Development Bank.
Secretary BARR. I have been intimately involved with the develop-
ment of the Urban Development Bank. There is a great deal of simi-
larity. I don't think ours is as far-reaching as yours but perhaps you
can look with interest at it. The Urban Development Bank has been
the product of a huge amount of staff work. We worked on this for 2
years. It may well be possible to make improvements, but there already
is a lot of work involved.
Senator JAvITs. Where is the detail?
Secretary BARR. I will sign the letter covering the legislation this
day.
Mr. ZwIcK. We will have a bill up.
Secretary BARR. There is a legislative proposal, a bill drafted.
Senator JAVITS. I am very grateful to yo!u, Mr. Chairman, and
gentlemen. I am sorry to have been so late and I apologize.
Senator PROXMIRE. Mr. Moorhead?
Representative MOORHEAD. Thank you, Mr. Chairman.
Mr. Chairman, Secretary Barr has said that is finishing a decade
of public service for which I can testify because 10 years ago Joe Barr
and I were first elected to Congress and started to serve sitting side
by side on the Banking and Currency Committee, and it might in-
terest you to know that freshman Congressman Barr suggested to me
that we travel around the country at our own expense visiting the
Federal Reserve banks and meet and talk with bankers so that we
could better understand our duties on the Banking and Currency
Committee.
Coincience would have it that one stop was at the Continental Illi-
nois Bank in Chicago were we met with Mr. David Kennedy, who
of course will be the s~uccessor to Secretary Barr. No one succeeds
like a defeated Congressman.
In this last testimony that you made before the committee, Mr.
Secretary, I commend you. I appreciate especially your candor on the
tax reform issue. Your bank may have lost some oil company depositors.
[Laughter.] I am also interested that you have come out very strongly
in favor of a more multilateral foreign aid program.
I remember that in our freshman year in `Congress we worked to-
gether on the International Development Association. I think you
would like to know that Mr. William Gaud made `some very cogent
and eloquent remarks-I suppose you wquld call him a bilateral AID
man in favor of IDA and multilateral aid before a subcommittee of
this committee.
I know that you have been, and I think very wisely, a strong advo-
cate of the surtax. I might say, like Congressman Bolling. I also had a
tax increase bill introduced in 1966, which was an election year, and
I want to just throw one idea out to you as Secretary and as a former
Member of Congress. S
PAGENO="0222"
218
What do you think of a proposal that would-unlike Congressman
Bolling's proposal which would permit the President to raise or lower
taxes-permit the President to raise but not to lower tax rates-sub-
ject to a congressional ~veto-beca~ise I believe we have learned the
theory and the political popularity of cutting taxes? I think if a Presi-
dent woul4 want us to cut taxes, I think that the procedures of the
Congress are such that we could move quickly. [Laughter.]
Secretary BARR. That has been amply demonstrated. The record
supports your statements, Mr. Moorhead, and I have stated publicly
that when we first went forward with Walter Heller's variable tax
proposal-I think it was 1962 or 1963-we made one mistake. We
should have followed the line that you did. In other words-what you
are suggesting, Mr. Moorhead-to give the President the acuthority to
raise taxes. He can take the heat if he has to, and when economic
conditions dictate that he must. Rest assured tha.t the Congress will
cooperate completely and promptly when the suggestion to reduce
taxes is laid before them.
I think it is a very practical political solution.
Representative MOORHEAD. Also, I think it is a da.ngerous congres-
sional delegation of political power to provide the President with dis-
cretionery power to cut taxes.
A President could use this power judiciously before reelection time
and almost assure his reelection.
Secretary BARR. Mr. Moorhead, I am sure no Presidents are going
to be unscrupulo~is or vicious, but I have heard the argument made,
you know, in a little different context, that he gets the delicious pleas-
ure of reducing them while others g~t the onerous chore of increasing
them.
You are quite correct. It is a good idea.
Representative MOORHEAD. As I see it, we are not eroding the con-
gressional prerogative in the tax field with this plan.
Secretary BARR. No. I support your position on the bill. I think it is
an excellent idea and it is practical.
Representative MOORHEAD. Mr. Zwick, I was also puzzled by the
New York Times editorial that is now a part of the record at Senator
,Javits' request, and I was particularly puzzled by the figure of $9
billion for highways for fiscal 1970. Is that a correct fig~ure?
Mr. ZwIoK. No, sir. The regular highway trust fund program in
fiscal 1970 is set at about the same level as in fiscal 1969-$4.8 billion
of obligations. As of now, spending is going to go up because of the
way we held down spending in fiscal 1969, but the obligation level-
and that is really the best index of program level for the highway
program-has been held constant, year to year, for the regular Inter-
state A-B-C program.
Now, in addition, we have added some new programs to the trust
fund. We have taken the existing safety program and highway
beauty program and put them into the trust fund. There are also new
programs, such as TOPICS which go up. But. if yorn take out the new
programs and look at the Interstate and A-B-C program, which is
the basic highway program, we held in the 1970 budget about. t.he same
program level as we did for 1969, and I am sure we are going to hear
some concern that it didn't go up enough. I don't know where the $9
PAGENO="0223"
219
billion came from. It is not $9 billion in any case. The basic program
level will be $4.8 billion.
Senator PRoxMIiu~. Maybe they are referring to public works as in-
cluding the hig~hways `csthich would `be close to $9 billi ~n.
Mr. ZwIoK. `Could be, but certainly not the hig~hwa.v program.
Representative MOORHEAD. Mr. Zwick, concerning th~ highway pro-
gram it seems to me unfortunate that we always refer to it as the
highway program. What we should be thinking about, it seems to me,
is the problem of moving people and goods, particularly into and out
of cities. Would it not `be more economical for this effort to earmark
certain public funds in a mass rapid transit system?
Mr. ZWIOK. Well, I can't answer that categorically. You have to look
at the volume of traffic, the geographic situation, and everything. But
I agree with your basic principle, that we ought to be looking at trans-
portation functions, urban trai~sportation functions, cross-modes, in-
tercity transportation functions.
Of course, that was the whole drive that created the Department
of Transportation and moved urban mass transit out of HUD into
the Department of Transportation.
Representative MooRHE~u~. Have there `been any studies showing the
net benefit to the motorist of a reduction in traffic jams, resulting from
the development of a mass rapid transit system, which would hope-
fully handle the bulk of commuter traffic-a system possibly funded
with a portion of highway trust money?
Mr. ZwIcK. Yes. That argument, of course, has been made for a purn~~
ber of years. We haven't been quite that bold in this proposaJ. Our
proposal does have a number of innovations. It does include the so-
called TOPICS program which is a traffic control system to use the
highway fund not only for building additional highways, but to do
work on traffic control, to get greater utilization out of existing rights-
of-way.
We use our existing rights-of-way quite inefficiently. We use them
as parking lots in the first place, curbside parking.
We don't get anywhere near the flow down these streets that we
could if we had a `better traffic control system. So we have initiated
a new program in this area. We sent up a bill last year, I believe, to
include some parking as part of the highway fund.
So I think there is a movement to `broaden the definition `of what the
moneys in the highway trust fund can be used for.
Now, when you go as far as using them for non-highway uses, you
will oreate quite a storm, `but I suspect over the next several years as
the Interstate System comes to an end-the original Interstate Sys-
tem is going to be completed and these revenues continue to come into
the highway trust fund-there is going to be a very significant and
very important public policy decision as to whether we eliminate these
taxes, whether we transfer them back to general revenue, or whether
we change the concept of the highway trust fund. I think it is one of
the most important policy decisions that you are going to be facing
`over the next several years.
Secretary BARR. May I add to that briefly, Mr. Moorhead. You are
going to be here. We are not. But as Mr. Zwick correctly pointed out,
these huge revenues are pouring in and, for heaven's sake, I hope y'ou
gentlemen and Mrs. Griffiths will not `let them pave the whole country.
Representative MooRHii~&u. Amen to that, Mr. Secretary.
PAGENO="0224"
220
Mr. Okun, although we have the first surplus in our balance of pay-
ments since 1957, I am very much disturbed that it is such a tenuous
surplus because of the unnaturafly high inflow of capital and the de-
terioration of the balance of tra.de.
To what extent can we look for an improved picture in the mer-
chandise trade `balance during 1969?
Mr. OKtTN. I think we do see a. prospect for a significant improve-
ment providing the program to keep the erowth of the economy mod-
erate is implemented and is successful. The story last year was the
22-percent surge in our imports of good and services. That certainly
reflected the fact that an overheated economy which couldn't meet
all the demands that were b~ing placed on it shunted some of those
demands to foreign goods. Our exports had a healthy growth, 9 or
10 percent.
What we would see for this year is a continuation of that growth
of exports with a very modest growth of imports and that should
begin to widen our trade surplus.
But it is going to be a long uphill course to get back to the kind
of healthy trade surpluses we had in 1964 and 1965 which did provide
a very firm foundation for our balance of payments. There is no ques-
tion that the United States has to have a significant trade surplus to
maintain the fundamental strength of the dollar in the years ahead.
Representative MOORHEAD. Thank you, sir. My time has expired,
Mr. Chairman.
Senator PROXMIRE. I know the hour is late. I know you have an-
other engagement. I am going to be as bri~f as I can.
I do wish to get into the balance of payments. I think it `has been in
the worst shape it ever has been, at least in the years I have `been here,
especially because of the merchandise `balance and the balance on
goods and services, which we were told about by Mi.meming yesterday
is minus 1.8 billion.
We have this extraordinary inflow of capital `at $7 billion capital
account w~hich is favorable, but that is so tentative and so temporary.
Let me get back to Mr. Zwick with two questions.
No. 1, Mr. Zwick, this follows up the questioning I had before:
Why does the Bureau continue to approve budget requests for pro-
grams where exorbitant cost overruns are reneated year after year
such as the C-5A cargo plane, the F-ill, F-4, Minuteman, and almost
every other major program?
We had testimony from Mr. Charles that on the average during
the 6-year life or so of the big weapon procurement programs they
escalate 200 to 400 percent, and we have talked to analysts at the
working level in the Bureau of the Budget who were very disturbed
about this and very concerned. Why dcesn't the Bureau of the Budget
ever say no, or are you in a position to say no?
Mr. ZwIcK. Of course, the issue is modernization in the Military
Establishment versus efficiency in procurement, and that is always a
difficult tradeoff. If we would procure standard items, stop moderni-
zation, clearly we could improve efficiency.
Senator PR0xMIRE. What I am getting at, if you could only get
into this operation which I think is something which has been iie-
glected, we haven't had a report on it, certainly it has been neglected
by those of us in the Congress. We haven't investigated it the way we
PAGENO="0225"
22~1
should have, and it is the biggest expenditure we have, and there just
seems to be no justification for these big increases.
They can't justify them on the grounds of inflation. The inflation
is a very, very small proportion of this.
Mr. Zwiou. I think it is design change, overly optimistic expec-
tations about technological advances, and so forth, that leads into
them.
Senator PRoxMIiu~. If you gentlemen could get into it, I think it
would be so helpful for us in Congress in making up our minds in
these areas. We have votes on the floors of the House and Senate on
these programs and if we can get some notion of whether or not we
should agree with-I am on the Senate Appropriations Committee, too,
where we have votes on this.
Mr. ZwIcK. Let me assure you I am not sanguine with the current
situation. It is a very difficult area. It is an area where you are pressing
the technology. People are making assumptions that if you invest
x dollars you will be able to push the state of the art to y. And there-
fore it will cost that much.
Senator PRoxa~mu~. Have you gentlemen ever said no on any of this?
You have said no on some of the other projects, civilian programs.
Do you feel you are in a position to recommend to the President that
we not go ahead?
Mr. ZWIOK. Yes. I participate in these decisions.
Senator PRoxMnu3l. Ha.ve you done that?
Mr. ZwIoK. Yes, sir.
Senator PRoxMiun. You have said no.
Mr. ZwIcK. Yes. I sometimes win, and usually [laughter] we don't
know quite how we come out on those, but I have as much to say about
these issues as I do any other.
Senator PROXMIRE. Let me finally ask you about the Trinity River
project.
The Trinity River project, as you know, is a project that would
provide for, as I understand it, developing a waterway between Fort
Worth and the Gulf of Mexico.
Mr. ZwIOK. That is right.
Senator PRoxi\rIiu. Dredge a channel. And there are those critics
who say, and I think with considerable conviction and reason, that it
would be cheaper to move Fort Worth to the gulf. On that, I am not
saying that this proposal which is going to cost three-quarters of a
billion dollars before it is through and which has a very small-
$150,000-advance engineering project, is in the budget because Texas
has extraordinary influence in this administration. But certainly
it is something to think about.
Here is a project which has a benefit-to-cost ratio of 1.5 on the 3i/4~
percent discount basis. It has a benefit-to-cost ratio of 1.09 on the
4%, which is now, as I understand it the discount basis that is being
used.
Now, if we recognize, as we should, it seems to me, and I know it is
very difficult because of the way Congress in working on this, if we
recognize that the only reason it has a J?ositive benefit~to~cost ratio
at all is because we show in here the savings which shippers experi-
ence in using the waterway rather than the appropriate concept of
savings in the national resources, if we showed it on a national re-
sources basis, it would have a negative benefit-to-cost ratio and heaven
24-833 0-69-pt. i-i5
PAGENO="0226"
222
knows if we used the discount ratio recommended to us by Otto
Eckstein and the other experts, a discount ratio of around 7 or 10
percent in this very, very risky project, it would show a negative
benefit-to-cost ratio.
How can you at a time when we have a so-called tight budget go
ahead with a project which is going to cost such an enormous amount
on such a flimsy-has such flimsy support on the merits?
Mr. ZwIcK. Mr. Proxmire, as I am sure you are aware, this is a
project that has been under study for years. It was authorized several
years ago-I am not sure whether it was 3 or 5 years by the Congress,
subject to restudy. It was restudied. The Corps of Engineers, given
the same ground rules they are using for other projects, reported a
1.5 benefit-to-cost ratio. You are now questioning whether that is an
appropriate evaluation procedure for all projects.
Senator PRox~rmE. You come up with a new-as I understand it,
the executive branch has agreed to the 4%.
Mr. ZwIcK. That is right, for projects that are being evaluated
from here on out, but the ground rule was that for any projects which
up to this date were approved and authorized by Congress, we would*
use the old procedure. So we are using a consistent procedure.
Senator PROXMIRE. This is in the 1970 budget. We haven't approved
the initial expenditure. Once we do, it is likely to be done forever, as
you know, so this is coming up now.
Mr. ZWIOK. There is money in the 1970 budget for initial planning
and design work, that is correct.
Senator PRoXMIRE. Why shouldn't we do it on the 4% percent now
in view of the fact it is not even going to be planned until 1970?
Mr. ZWIOK. You would change the procedure. What you are saying,
if I understand you correctly, is that you would change the procedure
that the executive branch is recommending for all projects. There is
no special treatment for this project. You are saying we ought to go
back and re-do all the ones we have.
Senator PROXMIRE. For 1970.
Mr. ZwIcK. That is up to Congress if you want to do it. We thought
it would be most appropriate to have a consistent policy across projects,
and so we arbitrarily said that projects approved before a certain date
would use the old formula and new projects would be evaluated with
the new formula.
Secretary BAlm. Mr. Chairman, we will be delighted to come back
this afternoon, but we do have our last Cabinet meeting.
Senator PROXMIRE. I understand. It. won't be necessary for you to
come back. I appreciate it. All you gentlemen have done a marvelous
job. I know Mr. Barr has been praised by all, but certainly Mr. Okun
and Mr. Zwick have done superb work. We are very grateful to you.
You have been very helpful and persuasive.
Secretary BARR. That is the way we feel precisely about you and
your committee, sir.
Senator PROXMIRE. Thank you very much. We will include as an
appendix to this day's hearing a Treasury Department document called
"Maintaining the Strength of the TLS. Dollar in a Strong Free World
Economy."
(Whereupon, at 12:20 p.m., the Joint Economic Committee
adjourned, subject to call of the chair.)
PAGENO="0227"
223
MAINTAINING THE STRENGTH
of
THE UNITED STATES DOLLAR
in
A STRONG FREE WORLD ECONOMY
A ~ PROGRI~SS RJ~PORT
THE DEPARTMENT OF THE TREASURY
December 1968
PAGENO="0228"
224
FOREWORD
In January, 1 released for public information the U.S. Treasury
Department report entitled "Maintaining the Strength of the United
States Dollar in a Strong Free World Economy."
That report gave the history of the United States balance of pay-
ments position and described various programs that had been under-
taken to resolve our balance of payments problem. The paper also
described in detail the Action Program that President Johnson an-
nounced in his Message to the Nation on the Balance of Payments
on January 13 1968.
As the President said in his message, our efforts to bring our balance
of payments into equilibrium and keep them there are "a national
and international responsibility of the highest priority." This is
certainly just as true now as it was in January. We have progressed
greatly in implementing many of the steps called for by the Action
Program. Unfortunately, some recommendations were not imple-
mented as quickly as we would have liked and certain ones not at all.
The results for the first three quarters of 1968 are a source of
encouragement. We have made steady progress during the year in
bringing our balance of payments closer to equilibrium. Nevertheless,
there is still a great deal to be done. We will have to continue the
policies and programs detailed in the Presidential message of Janu-
ary 1, 1968, if we are to bring our balance of payments into durable
equilibrium.
As Secretary of the Treasury and Chairman of the Cabinet Com-
mittee on Balance of Payments, I am releasing this Treasury Depart-
ment report entitled "Maintaining the Strength of the United States
Dollar in a Strong Free World Economy-A 1968 Progress Report."
This supplemental paper describes the progress we have made so far
in 1968 and points out the actions still required.
HENRY H. FOWLER,
Secretary of the Trea-sury.
(III)
PAGENO="0229"
225
Table of Contents
Page
Foreword - III
January 1, 1968, Statement by President Johnson Outlining a
Balance of Payments Action Program vii
Exchange of Letters between President Johnson and Secretary
Fowler Announcing the 1969 Balance of Payments Program XVI
I. The International Monetary System in 1968-Progress
and Problems 1
II. United States Balance of Payments-The Record to
Date - 8
III. An Intensified Effort To Achieve and Maintain a Healthy
United States Trade Surplus~ 11
IV. An Intensified Program To Moderate the Foreign Ex-
change Costs of Government Expenditures Abroad for
Security, Development and Other Activities 21
V. An Intensified Effort for Temporarily Reducing Outflows
of Capital From the United States 25
VI. A Long-Range Program for Promoting Foreign Private
Investment in United States Securities - - - - 28
VII. A Long-Range Program for Narrowing the Travel Gap
Through Promotion of Foreign Travel in the United
States and Temporary Measures To Reduce Travel
Outlays A broad by United States Residents 30
VIII. Adjustment Responses Expected of Trading Partners - - - 32
(V)
PAGENO="0230"
PAGENO="0231"
227
BALANCE OF PAYMENTS
Statement by the President Outlining a Program of Action,
January 1, 1968
WHERE WE STAND TODAY
I want to discuss with the American people a subject of vital concern
to `the economic health and well-being of this nation and the free
world.
It is our international balance of payments position.
The strength of our dollar depends on the strength of that position.
The soundness of the free world monetary system, which rests largely
on the dollar, also depends on the strength of that position.
To the average citizen, the balance of payments, and the strength
of the dollar and of the international monetary system, are meaning-
less phrases. They seem to have little relevance to our daily lives. Yet
their consequences touch us all-consumer and captain of industry,
worker, farmer, and financier.
More than ever before, the economy of each nation is today deeply
interwined with `that of every other. A vast network of world trade
and financial transactions ties us all together. The prosperity of every
economy rests on that of every other.
More than ever before, this is one world-in economic aff airs as in
every other way.
Your job, the prosperity of your farm or business, depends directly
or indirectly on what happens in Europe, Asia, Latin America, or
Africa.
`The health of the international economic system rests on a sound
international money ~n the same way as the health of our domestic
economy rests on a sound domestic money. Today, our domestic
money-the U.S. dollar-is also the money most used in international
transactions. That money can be sound at `home-as it surely is-yet
can be in trouble abroad-as it now threatens to become.
In the final analysis its strength abroad depends on our earning
abroad about as many dollars as we send abroad;
U.S. dollars flow from these shores for many reasons-to pay for
imports and travel, to finance loans and' investments, and to maintain
our lines of defense around the world.
(VII)
PAGENO="0232"
228
VIII
When that outflow is greater than our earnings and credits from for-
eign nations, a deficit results in our international accounts.
For 17 of the last 18 years we have had such deficits. For a time those
deficits were needed to help the world recover from the ravages of
World War II. They could be tolerated by the United States and wel-
comed by the rest of the world. They distributed more equitably the
world's monetary gold reserves and supplemented them with dollars.
Once recovery was assured, however, large deficits were no longer
needed and indeed began to threaten the strength of the dollar. Since
1961 your Government ha.s worked to reduce that deficit.
By the middle of the decade, we could see signs of success. Our
annual deficit had been reduced two-thirds-from $3.9 billion in 1960
to $1.3 billion in 1965.
In 1966, because of our increased responsibility to arm and supply
our men in Southeast Asia, progress. was interrupted, with the deficit
remaining at the same level as 196.5-about $1.3 billion.
In 1967, progress was reversed for a number of reasons:
-Our costs for Vietnam increased further.
-Private loans and investments abroad increased.
-Our trade surplus, although larger than 1966, did not rise as much
as we had expected.
-Americans spent more on travel abroad.
Added to these factors was the uncertainty and unrest surround-
ing the dei-aluation of the British pound~ This event strained the
international monetary system. It sharply increased our balance of
payments deficit and our gold sales in the last quarter of 1967.
THE PROBLEM
Preliminary reports indica.ted that these conditions may result in
a 1967 balance of payments deficit in the area of $3.5 to $4 billion-
the highest since 1960. Although some factors affecting our deficit
will be more favorable in 1968, my advisors and I are convinced that
we must act to bring about a decisive improvement.
We cannot tolerate a deficit that could threaten the stability of the
international monetary system-of which the U.S. dollar is the
bulwark.
We cannot tolerate a deficit t.hat could endanger the strength of the
entire free world economy, and thereby threaten our unprecedented
prosperity at home.
A TIME FOR ACTION
The time has now come for decisive action designed to bring our
balance of payments to-or close to-equilibrium in the year ahead.
PAGENO="0233"
229
Ix
The need for action is a national and international responsibility of
the highest priority.
I am proposing a program which will meet this critical need, and
at the same time satisfy four essential conditions:
-Sustain the growth, strength, and prosperity of our own economy.
-Allow us to continue to meet our international responsibilities in
defense of freedom, in promoting world trade, and in encouraging
economic growth in the developing countries.
-Engage the cooperation of other free nations, whose stake in a
sound international monetary system is no less compelling than
our own.
-Recognize the special obligation of those nations with balance of
payments surpluses to bring their payments into equilibrium.
THE FIRST ORDiER OF BUSINESS
The first line of defense of the dollar is the strength of the American
economy.
No business before the returning Congress will be more urgent than
this: To enact the anti-inflation tax which I have sought for almost
a year. Coupled with our expenditure controls and appropriate mone-
tary policy, this will help to stem the inflationary pressures which now
threaten our economic prosperity and our trade surplus.
No challenge before business and labor is more urgent than this:
exercise the utmost responsibility in their wage-price decisions, which
affect so directly our competitive position at home and in world
markets.
I have directed the Secretaries of Commerce and Labor, and the
Chairman of the Council of Economic Advisers to work with leaders
of business and labor to make more effective our voluntary program of
wage-price restraint.
I have also instructed the Secretaries of Commerce and Labor to
work with unions and companies to prevent our exports from being
reduced or our imports increased by crippling work stoppages in the
year ahead.
A sure way to instill confidence in our dollar-both here and
abroad-is through these actions.
THE NEW PROGRAM
But we must go beyond this, and take additional action to deal with
the balance of payments deficit.
Some of the elements in the program I propose will have a temporary
but immediate effect. Others will be of longer range.
All are necessary to assure confidence in the American dollar.
PAGENO="0234"
230
x
TEMPORARY MEASURES
1. Direct Investment
Over the past three years, American business has cooperated with
the government in a voluntary program to moderate the flow of U.S.
dollars into foreign investments. Business leaders who have partici-
pated so wholeheartedly deserve the appreciation of their country.
But the savings now required in foreign investment outlays are
clearly beyond the reach of any voluntary program. This is the unani-
mous view of all my economic and financial advisers and the Chairman
of the Federal Reserve Board.
To reduce ~ur balance of payments defk~it by at least $1 billio'm in
1968 from the estimated 1967 level, I am invoicing my authority vnder
the Banking Laws to establish a mandatory program that will restrain
direct investment abroad.
This program will be effective immediately. It will insure success and
guarantee fairness among American business firms with overseas
investments.
The program will be administered by the Department of Commerce,
and will operate as follows:
-As in the voluntary program, overall and individual company
targets will be set. Authorizations `to exceed these targets will be
issued only in exceptional circumstances.
-New direct investment outflows to countries in continental West-
ern Europe and other developed nations not heavily dependent
on our capital will be stopped in 1968. Problems arising from
work already in process or commitments under binding contracts
will receive special consideration.
-New net investments in other developed countries will be limited
to 65% of the 1965-66 average.
New net investmeiits in the developing countries will be limited
to 110% of the 1965-66 average.
This program also requires businesses to continue to bring back
foreign earnings to the United States in line with their own 1964-66
practices.
In addition, I have directed the Secretary of the Treasury to e~r-
plore with the Chairmen of the House Ways and Means Comrimittee
and Senate Finance Committee legislative proposals to indnce or en-
courage the repatriation of accumulated earnings by U.S.-own.ed
foreign businesses. -
2. Lending by Financial Institutions
To reduce the balance of payments defle4t by at least a'itother $500
million, I have requ&sted and autho'rised the Federal Reser~ve Board
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XI
to tighten its program restraining foreign lending by banks and other
financial inetitutions.
Chairman Martin has assured me that this reduction can be
achieved:
-Without harming the financing of our exports;
-Primarily out of credits to developed countries without jeopardiz-
ing the availability of funds to the rest of the world.
Chairman Martin believes that this objective can be met through
continued cooperation by the financial community. At the request of
the Chairman, however, I have given the Federal Reserve Board
standby authority to invoke mandatory controls, should such controls
become desirable or necessary.
3. Travel Abroad
Our travel deficit this year will exceed $2 billion. To reduce this
deficit by $500 million:
-I am asking the American people to defer for the next two years
all nonessential travel outside the Western Hemiephere.
-I am asking the Secretary of the Treasury to explore with the
appropriate congressional committees legislation to help achieve
thie objective.
4. Government Expenditures Overseas
We cannot forego our essential commitments abroad, on which
America's security and survival depend.
Nevertheless, we must take every step to reduce their impact on our
balance of payments without endangering our security.
Recently, we have reached important agreements with some of our
NATO partners to lessen the balance of payments cost of deploying
American forces on the Continent-troops necessarily stationed there
for the common defense of all.
Over the past three years, a stringent program has saved billions
of dollars in foreign exchange.
I am convinced that much more can be done. I believe we should
set as our target avoiding a drain of another $500 million on our bal-
ance of payments.
To this end, I am taking three steps.
First, I have directed the Secretary of State to initiate prompt ne-
gotiations with our NATO allies to minimize the foreign exchange
costs of keeping our troops in Europe. Our allies can help in a number
of ways, including:
-The purchase in the TJ.S. of more of their defense needs.
-Investments in long-term United State,s securities.
1 have also directed the Secretaries of State, Treasury and Defense
to find similar ways of dealing with this problem in other parts of
the world.
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XII
Second, I have instructed the Director of the Budget to find `ways
of redncing the number of American civilians working overseas.
Third, I have instructed the Secretary of Defense to find ways to
reduce further the foreign exchange impact of personal spending by
U.S. forces and their dependents in Europe.
LONG-TERM MEASURES
5. Export Increases
American exports provide an important source of earnings for our
businessmen and jobs for our workers.
They are the cornerstone of our balance of payments position.
Last year we sold abroad $30 billion worth of American goods.
What we now need is a long-range systematic program to stimulate
the flow of the products of our factories and farms into overseas
markets.
We must begin now.
Some of the steps require legislation:
I shall ask the Congress to support an intensified five year, $~00
million Oommerce Department program to promote the sale of Amer-
ican goods overseas.
I shall also as/ct/ic Congress to earmark $500 millian of the Export-
Import Ba'hk authori~ation to:
-Provide better export insurance.
-Expand guarantees for export financing.
-Broaden the scope `of Government financing of our exports.
Other measures require no legislation.
I have today directed the Secretary of Commerce to begin, a Joint
Export Association program. Through these Associations, we will
provide direct financial support to American corporations joining to-
gether to sell abroad.
And finally, the Export-Import Bank-through a more liberal
rediscount system-will encourage banks across the Nation to help
firms increase their exports.
6. Nontariff Barriers
In the Kennedy Round, we climaxed three decades of intensive effort
to achieve the greatest reduction in tariff barriers in all the history
of trade negotiations. Trade liberalization remains the basic policy
of the United States.
We must now look beyond the great success of the Kennedy Round
to the problems of nontariff barriers that pose a continued threat
to the growth of world trade and to our competitive position.
American commerce is at a disadvantage `because of the tax sys-
tems of some of our trading partners. Some nations give across-
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XIII
the-board tax rebates on exports Which leave their ports and impose
special border tax charges on our goods entering their country.
International rules govern these special taxes under the General
Agreement on Tariffs and Trade. These rules must be adjusted to
expand international trade further.
In keeping with the principles of cooperation and consultation on
common problems, I have initiated discussions at a high level wit~h
our friends abroad on these critical matters-particularly those na-
tions with balance of payments surpluses.
These discussions will examine proposals for prompt cooperative
action among all parties to minimize the disadvantages to our trade
which arise from differences among national tax systems.
We are also preparing legislative measures in this area whose
scope and nature will depend upon the outcome of these consultations.
Through these means we are determined to achieve a substantial
improvement in our trade surpl'us over the coming years. In the year
immediately ahead, we expect to realise an improvement of $500
million.
7. Foreign Investment and Travel in the United States
We can encourage the flow of foreign funds to our shores in two
other ways:
-First, by an intensified program to attract greater fo'reign invest-
ment in U.S. corporate securities, carrying out the principles
of the Foreign Invest ore TaxAct of 1966.
-Second, by a program to attract more visitors to this land. A
Special Task Force headed by Robert McKinney of Santa Fe,
N. Mex., is already at work on mea~ures to accomplish this.
I have directed the taek force to report within 45 days on the
immediate measnres that can be taken, and to make its long-term
recommendations within 90 days.
MEETING THE WORLD'S RESERVE NEEDS
Our movement toward balance will curb the flow of dollars into
international reserves. It will therefore be vital to speed up plans
for t:he creation of new reserves-the Special Drawing Rights-in
the International Monetary Fund. These new reserves will be a wel-
come companion to gold and dollars, and will strengthen the gold
exchange standard. The dollar will remain convertible into gold at
$35 an ounce, and our full gold stock will back that commitment.
A TIME FOR RESPONSIBILITY
The program I have outlined is a program of action.
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XIV
It is a program which will preserve confidence in the dollar, both
at home and abroad.
The U.S. dollar has wrought the greatest economic miracles of
modern times.
It stimulated the resurgence of a war-ruined Europe.
It has helped to bring new strength and life to the developing
world.
It has underwritten unprecedented prosperity for the American
people, who are now in the 83d month of sustained economic growth.
A strong dollar protects and preserves the prosperity of business-
man and banker, worker and farmer-here and overseas.
The action program I have outlined in this message will keep the
dollar strong. It will fulfill our responsibilities to the American people
and to the free world.
I appeal to all of our citizens to join me in this very necessary and
laudable effort to preserve our country's financial strength.
Exchange of Letters Between President Johnson and Secretary
Fowler Announcing the 196~ Balance of Payments Program
THE WiirrE HOUSE,
December18, 1968.
DEAR Mit. SECRETARY:
I have reviewed and approved the report of the Cabinet Committee
on Balance of Payments setting forth recommendations for 1969.
Our balance of payments program consists of a series of ongoing
policies in a number of related areas. It must at all times be coordinated
and pulled together. We have made our recommendation for 1969
at this time to facilitate an effective transition to the new Administra-
tion and the orderly development of future policies in this important
area.
We have made a great deal of progress in 1968 toward our goal
of a healthy equilibrium in our balance of payments. More progress
must be achieved to assure the continued strength of the United States
dollar. The stability of the international monetary system, and the
great amount of world trade which it supports, depends upon that
strength.
I would like to thank you and the other members of the Cabinet
Committee on Balance of Payments for your determined efforts to
propose and to do whatever is necessary to keep the dollar strong.
Sincerely,
(Signed) LYNDON B. ,JOHNSON.
The Honorable,
HENRY H. FOWLER,
Secret ary of the Trecumry
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THE SECRETARY OF THE TREASURY,
Washington, D.C., Decen-tber 17; 1968.
DEAR MR. PRESIDENT:
Near the end of each year beginning in 1965, your Cabinet
Committee on Balance of Payments has submitted a recommended
Program to guide and coordinate the many Federal activities relevant
to our international balance of payments. This letter report will set
forth the recommendations of the Cabinet Committee on Balance of
Payments for the 1969 Program. Your approval of this Program
should facilitate an effective transition and orderly development of
future policies in this important area.
With my colleagues on the Cabinet Committee and the aid of your
staff, we have coordinated the execution of the Action Program con-
tained in your Balance of Payments Message to the nation last New
Year's Day. A 1968 Progress Report will be separately submitted.
We have also considered together the nature and extent of the
program needed for 1969 if the nation is to build on the progress made
in 1968 and achieve a viable and durable equilibrium in our interna-
tional balance of payments. It is submitted below.
The Cabinet Committee on Balance of Payments has worked with
me in preparing the 1969 Program. The following participants join
with me in these recommendations:
The Secretary of Defense
The Secretary of Commerce
The Secretary of Transportation
The Under Secretary of Agriculture
The Under Secretary of State for Political Affairs
The Administrator of the Agency for International Development
The Special Representative for Trade Negotiations
The Director of the Bureau of the Budget
The Chairman of the Council of Economic Advisers
The Chairman of the Federal Reserve System.
A few preliminary comments are in order concerning the overall
policy framework in which these recommendations are submitted.
Our determination to achieve equilibrium in our international ac-
counts is as vital today as it was on January 1, 1968, the day you an-
nounced your Balance of Payments Action Program. The removal of
our international payments deficit remains "a national and interna-
tional responsibility of the highest priority".
The execution to date of the broad and comprehensive Action Pro-
gram you announced on last New Year's Day has substantially im-
proved our balance of payments situation. A huge deficit in 1967 has
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xv'
been whittled down to near equilibrium in the second and third
quarters of this year on the liquidity basis of measure. There is a
substantial surplus for the first three quarters on the official settle-
ments basis.
We are pleased that the nation is making substantial progress
toward achieving equilibrium in our international balance of pay-
ments. But we cannot be satisfied with the relative composition of
its components. Our progress is spotty and some of it may be transi-
tory. It is spotty because two big elements in our current account-
trade and tourism-are far from satisfactory, and a third-a reduction
in net deficit in Government military expenditures in Southeast Asia-
must in large measure await the restoration of peace in the area.
There is reasonable prospect of continuing improvement next year.
This assumes that there is no dismantling of the ongoing elements of
your Action Program. It also assumes that the initiatives launched
in that program to improve our trade surplus and reduce the net
deficits in military expenditures abroad and private travel will be
vigorously pursued. Until these elements of the program are effectively
executed, we will not have the durable surplus or the assurance of a
long-term equilibrium that will enable us to abandon some of the
temporary and less desirable measures we have been forced to employ.
These temporary measures have served us well. They helped bring
the necessary immediate improvement in our balance of payments and
have given renewed confidence in the strength of the United States
dollar. These temporary measures, appropriately modified, are needed
for some additional period. As the longer-term measures, `instituted
last year and in some of the preceding years, yield increasingly larger
benefits, the restraint achieved by the temporary measures may be
phased out.
To complete our task, a continued and sustained effort will be needed.
This is the quickest and surest route to the strong and viable payments
position which will permit us to eliminate those aspects of our pro-
gram that are not wholly compatible with the free flow of trade and
capital movements.
These are the underlying principles which your Cabinet Committee
on Balance of Payments believes should govern the program in 1969.
1. A Stable Economy and the Restoration of a Healthy United
States Trade Surplus Should be the Primary Objective for
1969.
The keystone of a sound international financial position of the
United States and of the dollar is a trade surplus. Without it, the
United States cannot do what is natural and desirable for its role in
the Free World-to export capital, to provide its share of the corn-
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XVII
mon defense, to give foreign aid, and to have large numbers of its
citizens traveling abroad.
Hence, the first order of business in your last New Year's Day
Message was for Congress to enact an anti-inflation tax, which, coupled
with expenditure restraint and appropriate monetary policy, could
help stem the inflationary pressures which threatened our economic
prosperity, stability and our trade surplus. You also urged labor and
management restraints in wage-price decisions and instructed your
principal officers in the economic area to work with leaders in business
and labor to make effective a voluntary program of wage-price re-
straint. A similar instruction on preventing our exports from being
reduced and our imports increased by crippling work stoppages was
prescribed.
Unfortunately, delays in attending to this first order of business in
1968 contributed to a continued instability in the economy and a very
substantial decline in our trade surplus. However, the progress that
has been made in recent months has laid the foundation for a much
better national performance in the area in 1969 and years ahead, if the
nation carries through with the program now in progress.
The Revenue and Expenditure Control Act, finally enacted in late
June, established our commitment to fiscal restraint.
The Congress and the President will have to decide in the months
ahead on fiscal policy for the period beginning July 1, 1969. This
policy will require decisions on expenditures and taxes necessary to
provide that degree of fiscal restraint which is a fundamental element
in an adequate follow-through in the ongoing process of disinflation,
restoration of our competitive position and provision of a healthy
trade surplus. This fiscal policy, coupled with appropriate monetary
policy by the Federal Reserve Board, will make possible the avoid-
ance of the excessive demand that has contributed to the decline in our
trade surplus. It will also enhance our competitive position by arrest-
ing inflation and enabling the economy to move back toward reasonable
price stability, given accompanying voluntary restraint in wage-price
decisions.
The Cabinet Committee on Price Stability, after consultation with
business and labor leaders, including the President's Labor-Manage-
ment Advisory Committee, is submitting a report on the progress
made and the plans for future cooperative efforts on the wage-price
front.
In 1968 we witnessed the adverse effects on our international trade
position of the work stoppage in copper and the potential work stop-
pages in steel and on the docks. These focused renewed attention on the
need for both labor and management to recognize the implications of
their actions and their positions on wage disputes and their relation-
ship to the protection of our national interest in maintaining the
strength of the dollar.
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xvm
2. Initiatives Pursued in 1968 To Assure Fairness to United States
Trade in World Markets Should Culminate in 1969 in Co-
operative Action by the United States and Our Trading
Partners.
In 1969 further reduction of non-tariff barriers and appropriate
changes in the General Agreements on Tariff and Trade rules on
border tax adjustments must be achieved. International trading rules
and practices are established through multilateral consent and nego-
tiated in the multilateral forum of the GATT. In early 1968 United
States representatives inaugurated a determined effort to eliminate
non-tariff barriers, review agricultural tra de, achieve improvements
in the trading rules and minimize the disadvantages to our trade which
arise from differences in the application of national tax systems to
exports and imports.
The GATT Committee on Industrial Products has developed a
catalog of non-tariff barriers to trade and is now turning to the
removal of these restrictions. Similarly the Agriculture Committee
of the GATT is conducting a general review of agricultural trade prob-
lems. In attempting to solve problems in these areas, we must be
realistic in our objectives and timetable. On the other hand, we cannot
be satisfied without real progress soon to eliminate the significant
non-tariff barriers. We must bear in mind that the Trade Expansion
Act of 1962 does not permit the United States to compensate with trade
concessions the removal by others of illegal non-tariff barriers.
The GATT Working Party on Border Taxes must complete its task
as early as possible next year. We believe there is a structural disadvan-
tagdto the United States, and to other predominantly direct-tax coun-
tries, which arises from the border tax adjustment system as pres-
ently permitted under the GATT rules. The lack of an overall limita-
tion on border tax adjustments, the proliferation of the practice, and
the unequal treatment prejudicial against one tax system as opposed to
another are problems in the GATT rules which must be addressed.
The United States has also raised the issue of the provisions in
the GATT rules which pertain to the process by which international
payments imbalances are adjusted. Under the GATT, countries suf-
fering temporary balance of payments difficulties may introduce
short-term trade restricting practices. such as quotas but the GATE
is silent on the responsibilities of surplus countries.
We have seen, in the month of November, two countries employ
other measures which also facilitate the adjustment of their balance
of payments position. Through the manipulation of border tax adjust-
ments, both France and Germany are endeavoring to influence their
trade accounts in a manner conducive to better overall payments
equilibrium. This course of action was chosen as an alternative to a
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XIX
change in parity-an action which would have a permanent effect
on trade. This experience should be examined to consider its lasting
implications for the process by which a nation's international pay-
ments are brought into balance.
3. The Department of Commerce Should Intensify Efforts to Ex-
pand Commercial Exports Generally and in Conjunction
with Foreign Assistance, and the Agency for International
Development Should Continue Measures to Assure Addi-
tionality and to Minimize Substitution in Foreign Assistance.
The long-term trade promotion program which you outlined in
your New Year's Day message should be pursued vigorously. These
efforts have been helpful to date, and they will have to be reinforced.
The recent recommendations of the National Export Expansion
Committee provide suggestions for reinforcements. These should be
considered.
The efforts of AID and other concerned agencies to minimize the
balance of payments cost of bilateral economic assistance have been
successful in keeping these costs to a minimum. The principles by
which this is done are established. The implementation of these prin-
ciples has now been under way for some time; and the regular,
vigilant administration of these methods is what is required `and is
what we are receiving.
Some of the most important by-products of economic assistance are
the trading benefits arising from the development and growth of
viable economies abroad. We trade and prosper together. Our tied
bilateral economic assistance, which transfers real resources has the
effect of facilitating the introduction of American goods and services
to these foreign markets. In distant areas, purchases of capital goods,
often bought to last for a lifetime, provide a continuing introduction
of the product names of our factories to foreign buyers.
In 1969 we must concentrate on developing follow-up sales after
these early "calling cards" have been delivered. Industry, assisted, if
need be, by Government, must expand upon the export opportunity
created by our economic assistance. This will require a sustained and
positive program.
The Commerce Department has cooperated closely with AID in
seeking ways to maximize United States commercial exports follow-
ing upon the foreign assistance program. In the area of publicity,
Oommerce provides information on AID business opportunities
through a variety of media such as International Commerce and Quar-
terly Summary of Future Construction Abroad.
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xx
In addition to information available through these publications,
Commerce provides information on AID export opportunities and
guidance on the procedures for selling under the AID programs di-
rectly to American businessmen through personal contacts. The Com-
merce Department also puts together annual United States trade
and investment programs for approximately 60 countries of main
commercial interest in the world. Specific informational, promotional,
and policy activities to be ca.rried out. in support of the program ob-
jectives are. delineated. For countries with AID Missions, the AID
operations generally constitute an important factor in achieving prog-
ress toward the investment program objectives. Additionally, the
Department of Commerce through its t.rade programs, commercial
exhibits and trade missions actively assists the United States exporter.
4. Consistent with Our Security Commitments, the Nation in 1969
Should Continue to Minimize Its Net Military Deficit by
Reducing These Expenditures Whenever Conditions Permit
and by Neutralizing Them Through Cooperative Action by
Our Allies.
We should stand by the principles which you enunciated in the
January 1 program:
"We cannot forego our essential commitments abroad, on which
America's security and survival depend.
"Nevertheless, we must take every step to reduce their ithpaet
on our balance of payments without endangering our security."
As we look at our overall balance of payments position and prospects,
it remains a key concept that the foreign exchange drain from United
States defense expenditures outside our borders for mutual security
is an extraordinary item in the balance of payments. It should be met
by special governmental action-it does not result from normal
economic developments; nor is it subject to normal economic manage-
ment through fiscal, monetary and incomes policies.
We need to maintain existing programs and~ constantly seek new
ways to reduce our defense expenditures abroad. The types of actions
by the Defense Department to reduce net foreign exchange costS during
the years 1961-1967, as described in "Maintaining the Strength of the
United States Dollar in A Strong Free World Economy", Tab B,
United States Treasury Department, January 1968, and in the Supple-
mental Progress R.eport for 1968, must be constantly pursued.
We welcome the extensive coopera.tion from countries in the North
Atlantic Treaty Organization and in other parts of the world during
1968 to minimize our military foreign exchange costs through:
-Purchase in.the United States of their defense needs; and
-Investments in long-term United States securities.
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xx'
In 1969 we will want to continue cooperation and conclude new
arrangements, with particular emphasis on NATO Europe. In the
coming year, we will want to build on past experience in ways which:
-Proceed from the NATO recognition of the principle that the
solidarity of the Alliance ~an be strengthened by cooperation
between members to alleviate burdens arising from balance of
payments deficits resulting specifically from military expendi-
tures for the collective defense;
-Increase the emphasis on purchases in the United States to meet
country needs for the improvements NATO has recently called
for in country forces; and
-Reduce reliance on investments in long-term United States securi-
ties as a means for dealing with our foreign exchange costs result-
ing from defense expenditures outside our borders, since these
investments do not provide the basis for a long-term solution.
In other parts of the world, we should give particular attention
to the Far East. Military expenditures related to Vietnam and the
prospective longer-term security situation in the region may be ex-
pected to continue a heavy drain on United States foreign exchange.
We will be looking to countries in the region to continue and expand
their cooperation with us to deal with this problem on a continuing
basis. Active negotiations to this end should be a continuing respon-
sibility of the Secretaries of State, Treasury, and Defense.
Of course, the principal opportunity to achieve actual reductions in
our gross defense expenditures abroad, without damage to our long-
term mutual security interests, is most likely to occur in connection
with progress in the negotiations looking to a peaceful settlement of
the conflict in Southeast Asia.
Even before our susbtantial involvement in military operations in
Vietnam in 1965, United States military expenditures in the major
Far Eastern countries were considerable. The direct foreign exchange
costs of these expenditures averaged about $700 million per year before
1965. They are currently running approximately $1.5 billion higher.
This heavy direct loss of dollars to and through East Asia must be
reduced when the fighting stops.
Therefore, a high priority must be given to the problem of neutraliz-
ing, to the maximum possible extent, the balance of payments cost of
our security forces in East Asia while the fighting continues, and re-
ducing the gross cost when the fighting diminishes or ceases.
5. The Mandatory and Temporary Foreign Direct Investment
Program, as Announced in Modified Form by the Secretary
of Commerce on November 15, 1968, Should Be Maintained.
The mandatory direct investment control program for 1968 has not
interrupted the high, indeed, unprecedented, level of total American
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XXII
investment abroad. It has had the intended effect of reducing capital
outflows from this country by increasing the use of funds borrowed
overseas for direct investment by United States affiliated enterprises.
Our base for future earnings continues to increase and the present
balance of payments costs are maintained within tolerable limits. The
private sector has for the most part understood this. The best way to
keep the program temporary is to press ahead vigorously on all features
of the balance of payments front.
There is little disagreement that this program should be temporary
and terminated as soon as possible. It is the view of your Cabinet Com-
mittee that it is not possible to terminate the program in 1969 without
running a grave risk that our progress toward balance of payments
equilibrium would be reversed and a heavy deficit become a likely
prospect. As stated earlier in the principles governing the formulation
of the 1969 program, until the nation has a durable surplus or the as-
surance of long-term equilibrium, it would be unwise to abandon some
of the temporary and less desirable measures that it has been forced
to employ.
This has a special relevance to the Foreign Direct Investment Pro-
gram as the following observations underscore:
First, overseas investments by American business (excluding Can-.
ada, which is exempt from the direct investment program) are.pro-
jected to increase again in 1969, with plant and equipment expenditures
reaching close to $8 billion-up from an estimated $7.5 billion this
year, and up from $4.6 billion in 1964, the last year before the introduc-
tion of the voluntary program.
Second, in order to hold the balance of payments impact of such
investment in 1968 to the $2.6 billion you targeted last January, it may
be necessary for United States companies and their foreign affiliates
to utilize between $2 and $2.5 billion of the proceeds of foreign bor-
rowing in addition to foreign borrowing for day-to-day working
capital requirements. To meet the new target for foreign direct invest~
ment of $2.9 billion in 1969, we project it may be necessary for busi-
ness to utilize another $2-2.5 billion in foreign borrowing next year.
Third, growing restraint upon capital flows from the United States
since the start of the voluntary program in February 1965 has resulted
in a substantial, and to some extent abnormal level of foreign debt by
United States companies and their foreign affiliates, as compared to
what it might otherwise have been without the foreign direct invest-
ment programs. We do not have any precise way to measure its size,
but it could approach $5 billion by the end of this year.
Fourth, during the past four years, in cooperation with the capital
programs, many United States companies have decreased their over-
seas liquidity through the reduction of inter-company accounts and
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XXIII
the repatriation of earnings, and, as a result, are more active, albeit
reluctant, borrowers for working capital purposes.
All of this suggests that termination of capital controls in 1969
could result in a sharp increase in capital outflows and retained earn-
ings-it is difficult to estimate the precise amount for much will depend
upon market conditions and other factors, but there is a potential
exposure of as much as $344 billion. The outlook for 1969 does not per-
mit taking the risk of that much additional direct investment hamper-
ing progress in our balance of payments program.
Basically, the 1969 Foreign Direct Investment Program will fol-
low closely the format of this year's program. However, some addi-
tional leeway is needed (a) to provide additional flexibility for
companies with limited or no overseas investment experience; (b) to
make the Regulations more responsive to those companies whose in-
vestment quotas are unrealistically low in relation to the return flow
of earnings from their direct investments; (c) to assure that the
program does not unnecessarily inhibit the growth of inter-company
exports of American goods and services to foreign affiliates; and (d)
to enable the Office of Foreign Direct Investments to be more re-
sponsive to special industry problems and some of the inequities in the
Regulations which have become apparent during 1968.
We recognize that just to maintain their existing overseas opera-
tions on a sound basis, companies must have the capability to retain
abroad a certain percentage of their foreign earnings. Furthermore,
retention of a portion of foreign earnings will be necessary to insure
an orderly retirement of the growing debt being contracted abroad.
We therefore recommended that the target level of direct investment
be increased to insure that every company has, in 1969, an investment
quota of at least 20 percent of its 1968 earnings from foreign direct
investment. This change was announced on November 15.
Some adjustment in the t.arget was also necessary to assure that
United States companies have additional quotas to expand exports of
goods and services through their foreign affiliates.
Further adjustments of the target were needed to make the Program
more responsive to hardships arising from the application of the
Regulations to special industries such as the international construc-
tion and transportation industries, whose operations and accounting
procedures do not dovetail with the Regulations; to provide relief
for companies whose ability to meet the repatriation requirements of
the Regulations is restricted by law or lack of control; to encourage
private investment of a developmental character in the less devel-
oped areas, and to provide companies . with no or limited prior
overseas investment experience. with a somewhat higher level of
permitted direct investment.
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XXIV
Finally, to enable companies to plan ahead and to insure that in-
vestment projects with important future bala.nce of payments po-
tential are not discouraged, the Office of Foreign Direct Investments
evolved its incremental earnings formula, under which additional
di~ect investment in future years is authorized on the basis of future
incremental earnings.
6. The Federal Reserve Voluntary Foreign Credit Restraint Pro-
gram Should be Maintained with Present Ceilings on Foreign
Lending from the United States, but in the Coming Year At-
tention Should be Given to Possible Modifications to Encour-
age Further the Promotion and Financing of Exports by the
Commercial Banking System.
The Federal Reserve program has required a great deal of United
States financial institutions and they have responded well. Since 1964,
United States commercial bauks have not increased the volume of
United States credits to foreign borrowers, even though the foreign
banking business has grown substantially in all other respects. In their
international operation, United States banks have had to meet the
demands of clients for foreign loans within their voluntary ceilings
and through the extensive use of resources in foreign branches.
The prospects for 1969 do not permit any basic change in the need
for restraint on foreign lending of United States banks and other
United States financial institutions. Accordingly, the existing volun-
tary ceilings for foreign lending by these institutions should be con-
tinued for 1969.
During the coming year, attention should be given to the effect of
the program on increasing United States receipts as well as on reduc-
ing United States capital outflows. Since 1964, annual exports from
the United States have increased by about 32 percent. Financing to
support the growth in exports has become available as banks have
changed the composition of their portfolios of foreign credits in re-
sponse to the voluntary program and to a lesser extent by the use of
funds in foreign branches and by the expansion of the Export-Import
Bank's direct lending. The Federal Reserve Board intends, in the light
of developments in the United States and abroad, to review its Volun-
tary Foreign Credit Restraint program early in 1969 in order to deter-
mine whether additional flexibility for financing United States exports
might usefully be provided in the program's guidelines.
7. The Interest Equalization Tax, which Expires July 31, 1969,
Should be Extended with the Existing Authority to Vary
the Rate from 11/2 Percent Down to Zero, Depending on
Circumstances.
The size and efficiency of the American capital market necessitated
the Interest Equalization Tax in 1963. This tax has served to facilitate
PAGENO="0249"
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xxv
greatly the expansion of the European capital market and to develop
additional techniques for employing savings around the world in pro-
ductive investments. Through preserving an exemption for lesser de-
veloped countries, the access they need for development assistance is
assured. In 1967, Congress granted the President certain discretionary
authority in order that the purpose of the legislation-which is to limit
but not prevent access to the capital market from developed coun-
tries-is best served.
In 1969, this legislation will need to be extended. In order that we
have available a method for phasing out this tax, the existing authority
to vary the rate of the tax from zero to 1½ percent per annum should
be retained.
8. A Five-Year Program is Needed to Narrow the Travel Deficit
Through Promotion of Foreign Travel in the United States
by Both Public and Private Action.
As has been pointed out repeatedly to the public and to the appropri-
ate Conmiittees of Congress, the trend of the conitribution of travel
to and from the United States to our balance of payments deficit is
such that the United States cannot continue to ignore the problem.
It was for this reason that in your New Year's Day Message you
sought to reduce the travel deficit by calling for voluntary action and
appropriate legislation. In 1967 this deficit exceeded $2 billion. If
the nation is to prevent the tourist deficit from continuing to rise and
possibly exceed $4 billion by 1975 (as United States disposable income
and the portion of it spent on foreign travel increases, and the new
airplanes with larger capacities and greater speeds bring lower fares),
the nation must begin to implement now a comprehensive long-term
program to increase rapidly the amount of foreign travel to this
country.
The President's Commission, formed in 1967, has provided numer-
ous suggestions worthy of attention, not only for immediate measures
already taken in 1968, but for the longer-term future.
Although final figures are not yet available, we must anticipate a
continued large travel deficit in 1968. It might well have been larger
but for the fact that many of the remedial measures recommended by
your Commission were carried out by Government and voluntarily
by the private sector.
The longer-term measures recommended by your Commission to
promote travel to the United States will require regular and adequate
financing. The simple fact is that the United States has a smaller
annual budget for promoting tourism than that of almost any other
industrial country.
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XXVI
One way to finance an appropriate and effective travel promotion
program would be to eliminate the exemption of international flights
from. the long existing five percent tax on airline tickets and to dedicate
a portion of the proceeds to a special fund to be used and expended
for travel promotion during the fiscal years 1970-74. There are, of
course, other ways. Early Congressional action is highly desirable.
We must not allow an increased touristS deficit to jeopardize progress
in other areas of the balance of payments nor to necessitate the main-
tenance of temporary restrictive measures on capital flows, nor to
handicap the United States in discharging its national security com-
mitments outside the United States.
The Cabinet Committee on Balance of Payments believes that these
policies will continue the very real gains already achieved under the
Action. Program you announced last New Year's Day, will maintain
the strength of the dollar, and will contribute to a strong free world
economy. In the year ahead, these policies will help to preserve these
gains and their contribution to a strong free world economy.
Faithfully yours,
HENRY H. Fown~.
The P1~esmE~r,
The White Hoi~se.
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L The International Monetary System in 1968-Progress and
Problems
The year 1968 has been a crucial one in the evolution of the inter-
national monetary system-probably the most significant year since
the establishment of the Bretton Woods institutions in 1944-45. Con-
ceivably this year will prove the most important turning point in the
monetary system since the emergence of the pre-war international gold
exchange standard system.
There have been two major developments during the year.
The first was the establishment of the two-tier gold price system
drawing a clear distinction between the role of gold as a monetary
reserve and the private commodity market for gold.
The second was the completion of negotiations on a Proposed
Amendment to the Articles of Agreement of the International Mone-
tary Fund establishing the facility for Special Drawing Rights. This
amendment was approved by the Governors of the Fund for submis-
sion to member governments. When this Amendment is ratified by
the requisite number of member countries of the IMF, it will enable
the nations of the Free World for the first time to create international
reserves by deliberate multilateral decision. They will, thereby, bring
to an end the traditional reliance on uncertain supplies of newly-
mined gold or the growth of liquid claims in the form of dollars,
sterling or other reserve currencies, associated with balance of pay-
ments deficits of the reserve currency countries.
Role of Gold in the Monetary System
Following the devaluation of the pound sterling on November 17,
1967, the international monetary system was placed under severe
pressure by heavy speculation in gold. Large amounts of gold were
purchased in the London market by foreign holders of dollars and
other currencies. This demand far exceeded current supplies of newly-
mined gold, and was met from gold supplied by the active members
of the gold pool-Belgium, Germany, Italy, the Netherlands, Swit-
zerland, the United Kingdom, and the United States. (France with-
drew from active participation in the pool in the summer of 1967.)
Through selling gold in the market the pooi was able to maintain the
commodity price of gold in London at about $35.20, a figure roughly
equivalent to the monetary price plus handling charges .and costs of
shipping gold to London from the United States.
(1)
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2
The active members of the gold pool met in Frankfurt, Germany,
on November 26, 1967, and issued a statement reiterating their agree-
ment to continue gold pool operations. For a short time this statement
calmed the speculation. But the private demand for gold continued at
an abnormally high level in December and in the first twelve weeks of
1968.
During the last quarter of 1967 and the first quarter of 1968, the
gold reserves of monetary authorities and international agencies were
drawn down by about $2.7 billion. Purchases were primarily for non-
monetary purposes, going into the hands of private holders.
The major loss was borne by the United States, whose gold reserves
dropped by $2.3 billion. The conversion of liquid assets into gold on
such a large scale placed a very serious strain on the international
money market, and short-term interest rates tightened severely. The
world faced the possibility of a severe financial squeeze, with rapidly
constricting international credit.
The members of the gold pooi had continued to supply gold during
January, February, and the first half of March, in the hope that the
unusual speculative demand would disappear. One factor in this exces-
sive demand was the United States statute requiring gold to be held as
a domestic reserve equivalent to 25 percent of Federal Reserve notes in
circulation. This gold cover requirement, an historical survival from
earlier days when gold and currency notes both circulated domesti-
cally, was regarded in the market as a possible limitation on the amount
of gold which the United States would be prepared to pay out. The Ad-
ministration, therefore, recommended legislation to eliminate the gold
cover requirement. The House of Representatives approved the meas-
ure on February 21, and the Senate acted on March 14. This provided
the United States with the flexibility of policy needed to undertake
a new approach to the gold problem.
On March 16-17, the Governors of the Central Banks actively
participating in the gold pool met in Washington, under the chair-
manship of Chairman Martin of the Federal Reserve Board. They
adopted the so-called "two-tier" gold price system under which the
private commodity price of gold is permitted to fluctuate without
official intervention, while the official price of gold in its monetary
role remains fixed at $35 per ounce in transactions among monetary
authorities. The participants agreed that in view of the forthcoming
faculty for Special Drawing Rights, they "no longer felt it necessary
to buy gold from the market". The decisions taken in Washington have
been broadly supported by most of the monetary authorities of the
Free World. During the IMF meeting in Washington in early October
1968 this position was reinforced during some special sessions of the
central bank governors of the active gold po~l members plus those from
Canada, Japan and Sweden.
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3
Under the two-tier system, the commodity price for gold has fluctu-
ated within a range of about $38 to $42 per ounce and the loss of mone-
tary gold to the commodity market has ceased. Monetary authorities
have continued to cooperate in a responsible manner in managing their
transactions in monetary gold at the official price, and the gold reserves
of the United States have risen since the end of March 1968.
The Washington Communique of March 17 made clear the fact that
it is unnecessary to rely in the future on gold as a major `source of
additional monetary reserves. Existing monetary gold reserves will
continue to play their role but over time should gradually become a
smaller part of total world reserves. Special Drawing Rights, which
will serve as a supplementary reserve to both gold and dollars, will be
the long-run growth element in world reserves.
Facility for Special Drawing Rights
The second major development in 1968 was the completion of the
Proposed Amendment establishing the Special Drawing Rights Fa-
cility in the International Monetary Fund and its approval by the
Governors for submission to member governments for formal ratifi-
cation. This process of ratification is now in progress. The new facility
comes into existence when 67 members of the Fund (three-fifths of
the membership), having 80 percent of the votes in the Fund, formally
ratify the Amendment and when, in addition, members of the Fund
having 75 percent of the total quotas in the Fund certify to the Fund
that they are qualified and able to participate in the facility. The
process of ratification and certification is expected to be completed
early in 1969.
Although an Outline Plan for the Special Drawing Rights had
been approved at the Annual Meeting of the Fund in Rio de Janeiro
in September 1967, some further negotiations were required to com-
plete the detailed provisions of the plan and to prepare certain other
amendments to the Fund's Articles of Agreement proposed by the
continental European countries. These other amendments strengthen
to some extent the position of the creditor countries in the Fund.
These issues were resolved among the Group of Ten Ministers
and Governors at a meeting in Stockholm on March 29-30, 1968. The
French representative, however, did not join with the other members
of the Group of Ten in approving the compromise text of the omnibus
Proposed Amendment, but reserved France's position. Following the
Stockholm meeting, the Executive Directors were able to complete
the formal legal text of the Proposed Amendment. This was sub-
mitted to the Governors of the Fund on April 16, 1968, and subse-
quently received the favorable vote of the Governors of the Fund.
PAGENO="0254"
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4
The Proposed Amendment was then submitted to the member gov-
ernments for formal ratification.
In the United States, the National Advisory Council on Interna-
tional Monetary and Financial Policies prepared a Special Report
on the Proposed Amendment which Secretary Fowler transmitted to
the Congress on April 26, 1968. President Johnson addressed a Special
Message to the Congress on April 30, 1968, entitled Strengthening
the International Monetary System, recommending approval of
the Amendment and authorization of participation by the United
States in the Special Drawing Rights facility. The House of Repre-
sentatives approved the necessary legislation on May 10, 1968, by an
overwhelming majority of members of both parties, and the Senate on
June 6, 1968, by a voice vote. The United States became the first mem-
ber of the Fund to complete acceptance of the Proposed Amendment
and certification of participation in the facility.
Special Drawing Rights will not be created until the Amendment
has been ratified and "activation" is decided upon by the participants
in the new facility. To assure that there is a very wide consensus among
the members of the plan as to the amount of Special Drawing Rights
to be created, a decision to activate must be approved by an 85 percent
weighted vote of the participating members of the Fund.
An excessive addition to international reserves could give some
impetus to world inflationary pressures. However, a deficient supply
of world reserves can create a difficult and persistent strain on the
international monetary system. When there is no increase in global re-
serves, one country can add to its reserves only at the expense of some
other country or countries. The resulting competition for reserves
can lead to an escalation of world interest rates, and to a cumulative
spreading of restrictions on international transactions, as countries
try to protect their existing levels of reserves or make additions to
their reserves. It ~s already clear that. few countries are prepared to
look with equanimity on any sizable or prolonged reduction of their
reserves, even when these reserves have grown substantially in recent
years, as is the case in continental Western Europe. These are some of
the considerations that will be taken into account in the initial decision
as to activation of the Special Drawing Rights.
It is very clear, however, that despite a general beneficial effect on
the equilibrium of the monetary system as a whole, the Special Draw-
ing Rights will not remove nor even appreciably modify the need to
achieve equilibrium in the balance of payments of individual countries
through appropriate adjustment policies. While Special Drawing
Rights can moderate the extreme severity of balance of payments
pressures that would occur in the absence of any reserve creation, the
process of adjustment of international balances remains one of the
PAGENO="0255"
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5
most difficult and challenging problems in the field of economic policy
and international economic cooperation.
The Franc-Deutschemark Crisis, November 1968
In May and June 1968, the French franc came under pressure in
the exchange markets as a result of an outbreak of strikes and student
disorders on a large scale. Settlements in labor negotiations were esti-
mated to increase wage rates within a range of 10 to 14 percent, or
about double the previously anticipated annual rise in money wages.
The shock of the May-June events was reflected in a heavy outflow of
capital from France; French reserve of gold and foreign exchange
were drawn down from $6 billion at the end of April to $4 billion at
the end of November.
In September, the pressure on the franc was accentuated by rumors
of a possible appreciation of the Deutsehemark. These rumors sub-
sided soon but resumed in early November when liquid funds again
began to flow into Germany in large volume. The speculation was
encouraged by the continuation of a very large German trade surplus
and by the market's belief that the Federal Republic of Germany
could not maintain sufficient long-term capital outflows to offset its
current account surplus.
The market situation worsened at mid-November. The major Euro-
pean exchange markets were closed on November 20, and a special
meeting of the Ministers and Governors of the Group of Ten was
called for November 20 in Bonn. Secretary Fowler, who had attended
the North Atlantic Treaty Organization Ministerial Meeting in Brus-
sels and was paying a series of farewell visits to his colleagues in
Europe, took an active role in the calling of the meeting
The primary objective of the United States, supported by the
other Ministers, was to obtain assurances that the pressures of the crisis
would not result in any excessive exchange rate adjustment that would
seriously undervalue any currency and introduce the threat of cumula-
tive or competitive devaluations. The United States set forth the
basic principle that exchange rate changes of major financial powers
should not take place without consultation between the governments
of these major countries.
The decisions associated with the November meeting did not in fact
result in any exchange rate adjustments. The German authorities
proposed, as their principal contribution to reducing the German
surplus, an adjustment in border taxes having effects somewhat similar
to a revaluation of the Deutschemark but applicable only to trade in
physical goods. They estimated that this measure would reduce Ger-
many's annual trade surplus in 1969 by about one-fourth. The French
decision, announced on November 23, was to maintain the value of the
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6
franc without change. France also announced measures of internal
restraint, restored tight exchange controls, and made limited adjust-
ments in border taxes designed to strengthen its trade position. The
impact of these measures on France's current account alone has been
estimated to be as much as $1 billion in 1969. Finally, the authorities
of the United Kingdom introduced a system of import deposits, in-
creased internal taxation, and imposed additional credit restraints
as a means of assuring their balance of payments objective of a sub-
stantial surplus by the end of 1969. At the same time, a large multi-
lateral credit arrangement, amounting to $2 billion, was established by
the monetary authorities of the Group of Ten, Switzerland, Norway,
Denmark and the Bank for International Settlements, to support the
French franc.
Thus the franc-Deutschemark speculative crisis was met by a further
instance of international cooperation, in which actions were taken
to reduce imbalances by both deficit and surplus countries, and fi~
nancial support was mobilized for a threatened currency. The ex-
change difficulties in November were confined to the major European
currencies. Unlike the gold crisis earlier in the year, there was no
drain on the reserves of the United States.
Since November 25, the pressure on the franc has subsided and
funds have been flowing from Germany.
Nevertheless, this crisis demonstrated once again that very large
amounts of funds may move in response to concerns regarding domes-
tic inflation or the possibility of gain through monetary appreciation.
It underlined the need for continuing efforts to strengethen coopera-
tion among the monetary authorities.
One important aspect in the pursuit of this ideal is the completion
of ratification and the early activation of the Special Drawing Rights
facility. Other techniques for strengthening the system will need to be
explored as experience accumulates.
Further evolution of the international monetary system may not
involve such fundamental changes as we have seen in 1968. However,
it is important that, while conserving our proven arrangements, we be
prepared to consider future changes in the international monetary
system with an open mind. It is also essential that we continue to build
upon the foundations of multinational cooperation that have been
developed in recent years.
At many times in the past, there `has been a tendency to look upon
international monetary problems from a narrow nationalistic and
short-range view. In recent years, we have~ made significant progress
toward establishing the principle of cooperative multilateral action
in handling the financial affairs `~hich affect the major countries and
major currencies. If this principle is observed, we can be assured that
future changes in the system will be discussed and agreed upon in a
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7
cooperative way by a preponderant majority of the nations that have
a large stake in the functioning of the international monetary system.
Hopefully, the acceptance of this principle will also mean that future
destabilizing influences will be contained by the cooperative action of
all of the nations immediately concerned.
In Secretary Fowler's speech at the Annual Meeting of the Inter-
national Monetary Fund in Washington in October 1968 he noted
the approval of the new facility for Special Drawing Rights. He
pointed out that this major step in the evolutionary process of
improving the international monetary system resulted from the thor-
ough study and painstaking discussion of the prthlem in international
bodies, in legislative committees, and in academic circles and the
press. He expressed the hope that:
"Further evolutionary changes in the international monetary
system would emerge in the same way. The only appropriate
way to seek improvement in the system is through the same
procedure of careful study, widespread official and public discus-
sions, and carefully considered action."
Secretary Fowler also commented that:
"We started with the strong foundation built at Bretton Woods.
We built an impressive network of international cooperation on
that foundation. We built a major addition to that foundation
in the Special Drawing Rights Amendment. We must be pre-
pared in the future, as we have in the past, to approach together
and to work out together additional ways to strengthen the
international monetary system. To do less is to fail in our respon-
sibilities to maintain and advance our public trust."
24-833 0 - 69 - pt. 1 - 17
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254
II. United States Balance of Payments-The Record to Date
For three successive quarters,1 our over-all balance of payments
position has improved under the impetus of the President's Action
Program. The `huge liquidity deficit of $1,742 million `in the fourth
quarter of 1967 was reduced this year to $680 milliou in the first
quarter and $160 million in the second quarter. In the third quarter,
the United Slates achieved a. small surplus of $35 million, the first
quarterly surplus since the second quarter of 1965.
Improvement of the official settlements balance was also impressive.
The fourth quarter, 1967 deficit of $1,082 million was reduced to $552
million in the first quarter of this year. Surpluses of $1,523 million and
$439 million were recorded in the second and third quarters,
respectively.
For `the firSt nine months of 1968 the liquidity deficit showed a $1
billion improvement over the same period in 1967, while the official
settlements balance showed a $3.7 billion improvement between the two
nine-month periods.
These results are encouraging and they have contributed to a
strengthened position of the dollar in foreign exchange markets. But
the gains in these over-all measures do not reflect a balanced improve-
ment in all the major balance of payments components covered by the
President's Action Program.
The trade account, which began deteriorating in the fourth quarter
of last year, continued that trend in the first two quarters of this year.
Only a mild turn-around occurred in the third quarter.
Exports have performed creditably, except in the agricultural sec-
tor; but there has been an extraordinary surge of imports. This re-
sulted partly from the excessive level of domestic demand fostered
by the tardy passage of the anti-inflation fiscal package. But strikes
and the threat of strikes in various industries caused extraordinary
imports of between $600 and $700 million, representing an irreversible
loss to the balance of payments.
The trade position must be restored to a much higher level of sur-
plus in order to sustain the over-all improvement in the balance of
payments.
Achievement of the program goals was also thwarted in the travel
acco~rnt. The Congress has not approved recommended measures to
1 Data given here are those contained in the report for the third quarter of 1968 released
by the Department of Commerce on November 15, 1968; some preliminary figures there In
are subject to later revision.
(8)
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9
reduce the growing tourist deficit. While that deficit is running some-
what below the 1967 level (when Canada's "Expo `67" attracted an
unusually large number of American visitors) the underlying trend of
increased net outflows is likely to continue far into the future. Gross
expenditures of American `tourists are approaching $4 billion per year,
riot much less than total military expenditures abroad.
The continued increase in foreign purchases of American securities
has been a particularly favorable factor this year. This result is in part
attributable to the efforts set in motion by a Presidential Task Force
Report in 1964 on Promoting Foreign Investment in United States
Corporate Securities. The increase in these purchases in the first three
quarters of 1968 over the same period a year ago was about $800 million
(excluding a large capital input by a foreign firm into its American
subsidiary).
While part of this increased investment was influenced by political
disturbances abroad, it must be borne in mind this trend started long
before the events of May in France or the invasion of Czechoslovakia
in August. Indeed, reflecting the continued high preference for the
dollar, the level of net foreign purchases of portfolio equity securities
actually accelerated between November 1967 and February 1968. After
the gold crisis in early March, the level of inflow continued to increase
substantially.
The Foreign Direct Investment Program of the Department of
Commerce has progressed favorably toward its goal of a $1 billion
reduction between 1967 and 1968 in direct investment subject to the
program. In the first three quarters of this year, utilization of funds
borrowed abroad has been several times greater than in the corre-
sponding period of last year and remitted earnings from direct invest-
inent were running 14 percent above the level of the same period a
year ago. At the same time the program would not appear to be inter-
fering in any serious degree with overseas plant and equipment
expenditures by American firms.
The 1968 goal of the Voluntary Credit Restraint Program of the
Federal Reserve Board is to achieve a $500 million improvement in our
balance of payments from a reduction of loans to foreign borrowers by
Ui~ited States banks and other financial institutions. This target seems
likely to be exceeded on the basis of performance in the first ten months
of this year.
The programmed $500 million reduction in net government ex-
penditures outside the United States will probably be exceeded.
Special financial arrangements to reduce or offset our military expend-
itures `abroad are proceeding `satisfactorily, particularly in the
NATO-European area. The Ageiicy for International Development
is reducing its cash transfer below last year's level and is striving
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10
to insure that exports of American goods which it finances are addi-
tional to normal commerical sales. The program for reduction of civil-
ian employees overseas is on schedule.
The above developments attest to the importance and large measure
of success of the January 1 program. These achievements occurred
during a year in which the excessively rapid growth of the domestic
economy, serious strikes and strike threats, and the lack of legislative
authority to deal adequately with the tourist deficit presented for-
midable obstacles to improvement in the balance of payments.
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257
III. An Intensified Effort to Achieve and Maintain a Healthy
United States Trade Surplus
A. Introductory Comments
The cornerstone of the United States balance of payments position
has always been a substantial trade surplus. In the years 1950-55, the
surplus averaged $2.2 billion; in 1955-60, it averaged $3.8 billion; and
in 1960-65, it averaged $5.2 billion. Our trade surplus reached an all-
time high of $6.7 billion in 1964, when some particularly favorable
factors were operating; however, since 1964, it has steadily declined.
The surplus narrowed to $4.8 billion and $3.7 billion in 1965 and 1966,
respectively. The 1967 surplus was reduced to *the somewhat lower
level of $3.5 billion. In 1968, our trade surplus has deteriorated sharply
from the 1967 level, and it is expected that it will be less than $1 billion
or $3 billion less than the `target established in the President's
January 1 balance of payments message and $2.5 billion less than the
1967 total.
Certainly, the most disappointing aspect of our recent balance of
payments performance has been the steep decline of our trade surplus
which started in the latter part of 1967 and continued through the first
half of 1968.
It has been natural for the United States, as the most economically
advanced nation in the world with a comparative trade advantage
in a wide range of products, to have a, surplus in its trade account. The
United States has special responsibilities because of its role of leader-
ship in the Free World. Therefore, it is necessary for the United
States to have a sufficient surplus in its trade account so that it will
be able to export capital, to pay its fair share of the collective de-
fense and foreign aid efforts, and to phase out the temporary restraints
in the balance of payments program.
United States' exports and imports are strongly influenced by the
pressures generated in our economy which affect the competitiveness
of American products and also by the economic and trade policies
followed by the major trading nations of the world. Future trade
prospects for the United States will depend upon:
-sound management of our domestic economy;
-success in our efforts to obtain reasonably free access to foreign
markets for our goods;
-the level of demand in our markets abroad; and
(11)
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12
-the realization of the export potential of our industry through
selective export expansion programs.
B. Soundly Managing the United States Economy To Keep It
Competitive and Stable
President Johnson stated in his January 1 Message On The Balance
of Payments that the first order of business was to take the necessary
steps to stabilize our economy. Enactment of the Revenue and Expendi-
ture Control Act of 1968 was the key to stability. The President also
urged labor and management restraint in wage-price decisions and
instructed the principal officials in the economic area of the Adminis-
tration to work with leaders in business and labor to make effective
a voluntary program of wage-price restraint. A similar instruction
dealt with preventing costly work stoppages which could reduce ex-
ports and increase imports.
Unfortunately, delays beyond the reach of the Executive Branch
in accomplishing this first order of business contributed to continued
instability in the American economy and thus to an unsatisfactory
performance in the trade areas. Our exports grew by a very satisfactory
rate of 9.1 percent during the first nine months of 1968 to a level of
$25 billion-or an annual rate of $33.4 billion. A large part of the
deterioration in the trade account was due to overheating in the do-
mestic economy which led to an excessive high rate of imports.
Imports rose by 24.9 percent in the first nine months of 1968, as com-
pared with 1967, to reach a level of $24.8 billion-an annual rate of
$33 billion. Our trade account in 1968 has been hurt also by a series
of major work stoppages or threats of strikes in industries such as
copper, steel and aluminum. It is estimated that the trade account
suffered in the first nine months by over $600 million as a result of
these labor difficulties. There has also been the threat of a possible
strike by the East and Gulf Coast Longshoremen Association now a
reality, this strike if continued for any length of time will affect the
balance of payments adversely.
Passage of the Revenue and Expenditure Control Act of 1968,
although delayed to midyear, had an important effect on stabilizing
the domestic economy. The outlook today is for a small budget surplus
for Fiscal Year 1969 as compared with an estimated deficit before
passage of the legislation of approximately $25.4 billion for FY 1968.
Also passage of this tax and expenditure control legislation, par-
~icularly in an election year, did much to restore confidence in the
United States Government's determination to manage its financial
affairs appropriately. As a result, the recent disturbances in the foreign
exchange markets of the world hardly affected the dollar. The Revenue
and Expenditure Control Act expires on June 30, 1969. Decisions will
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be necessary in the months ahead on the appropriate fiscal and mone-
tary policies for the period beginning July 1, 1969, and on the de-
sirability of extending the income tax surcharge.
Our overall performance in 1968 with regard to wage-price restraint
has not been at all satisfactory. Some settlements were clearly exces-
sive. The Cabinet Committee on Price Stability, after extended study
and consultation with business and labor leaders, including particu-
larly the President's Labor Management Advisory Committee, is sub-
mitting recommendations for a more lasting and effective effort on the
wage-price front.
C. Making United States Industry more Export Minded Through
Selective Export Expansion Programs
Our objective has been to encourage the nation's producers to ex-
port more. We have employed active and direct measures to supple-
ment our efforts to achieve a soundly managed economy and an open
trading community. To this end, the United States Government is
involved in making American industry more export minded through
a number of export expansion programs.
In 1968, we established and activated the following programs:
-The $500 million Export Expansion Facility was created within
the Export-Import Bank to expand and improve export financing,
guarantee and insurance facilities available to American export-
ers. This facility, enacted into law in early July, through Novem-
ber had already helped to finance over $90 million of American
exports.
-The Export-Import Bank announced a liberalized discount sys-
tem on April 1 that has been well received in the financial com-
munity. In the period between April 1 and November 30, 1968,
export credits totalling $184 million were financed through this
facility. This compares to a total activity of $270 million from
the program's inception in September 1966 to March 30, 1968.
The Commerce Department has launched the five-year, $200 million
comprehensive export program announced by the President in Janu-
ary. Although budgetary limitations have been present, Commerce
has achieved the following results:
-The first Joint Export Association contracts are in the final stages
of negotiations and will be signed early ~in January 1969. Under
these contracts the Department of Commerce will provide finan-
cial assistance to groups of American firms in developing overseas
markets.
-The Department of Commerce has expanded its overseas commer-
cial exhibition program and related activities in the United States
to make American business more export minded.
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-Foreign markets are being systematically and continuously
analyzed and the best markets for American industries are being
pinpointed, product by product.
-Significant improvements in automated informational services
have been made.
-Two new Trade Centers are in the process of being established.
The first will open in Paris in the fall of 1969.
-A national strategy for expanding exports over the next five years
is in process of development.
These positive, carefully planned, long-range efforts yield impor-
tant results. For example, during the FY 1964-67 period, Commerce
spent $19.9 million promoting exports by means of overseas trade
fairs, trade centers and American Weeks. Confirmed first year sales
that resulted from these promotions amounted to $300.5 million-more
than 15 times the initial cost. On a balance of payments basis, results
are even more favorable. Since only about 45 percent of our appro-
priated funds for these three programs is expended overseas, the direct
impact on the balance of payments has been $33 in export sales within
one year of the export promotion event for each Commerce dollar
spent overseas.
Recent analysis indicates that $300.5 million in sales will generate
tax receipts by the Treasury of $18 million. Thus the net cost of the
program during this four-year period, on the basis of one year sales
results, was $1.9 million. Succeeding year sales and revenue receipts
are obviously very large and could more than offset this cost.
To make these long-term programs effective, energetic and con-
tinuous efforts, and adequate funding, are required. Comparatively
smadl amounts of carefully spent dollars yield important dividends
in the future, both in revenue and in balance of payments terms. In
the competing requests for budgetary funds positive programs to
achieve long-range balance of payments effects must get an important
and a reliable commitment of financial resources over the long run.
D. Keeping World Markets Open and Fair
The United States has consistently taken the lead in bringing the
world community toward more liberal trade. Our policy has been di-
rected toward a freer flow of goods, services, and capital. President
Jolrnson emphasized this policy in his New Year's Day Message: "In
the Kennedy Round we climaxed three decades of effort to achieve the
greatest. reduction in tariff barriers in all the history of trade negotia-
tions. Trade liberalization remains the basic policy of the United
States."
The world of international trade and finance has come a long way
since World War II. Reconstruction of the industrialized countries
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15
reached the point some time ago where the generation of capital and
savings was sufficient to satisfy their domestic needs. The improved
economic and financial position of the industrialized countries has
enabled them to assume, for the most part, their responsibilities to end
currency restrictions as provided under Article VIII of the Inter-
national Monetary Fund Agreement. Since post-war economic recon-
struction has long since been completed, the United States can no
longer look aside when any of these industrialized countries takes
action which prejudices our own trading and payments position. The
United States can no longer be as tolerant, as it was in the early post-
World War II period, of harmful trade measures employed or con-
tinued too long by other countries. President Johnson took note of
this point in his New Year's Day Message:
"We must now look beyond the great success of the Kennedy
Round to the problems of nontariff barriers that pose a continued
threat to the growth of world trade and to our competitive posi-
tion. American coimnerce is at a disadvantage because of the tax
systems of some of our trading partners . . . ."
Steps Underway To Reduce Non-Tariff Barriers
Efforts to achieve and maintain a healthy United States trade
surplus must be directed not only toward obtaining price stability at
home but toward expanding liberal trading practices which provide
equal access to the markets of the world. This past year has seen a
pronounced increase in our efforts to make world markets more open
and fair. S
Most of these efforts have been pursued multilaterally, through the
General Agreement on Tariffs and Trade, where international trading
rules and practices have been codified and established. Basically, the
rules limit the extent to which countries can raise new nontariff
barriers and they provide a framework for the reduction of such
barriers. Countries in balance of payments difficulties are permitted
to maintain or establish quantitative import restrictions and are re-
quired to consult with other countries in the General Agreement on
Tariffs and Trade under a waiver procedure. The United States has
increased the emphasis it places upon the GATT by furthering multi-
lateral discussions on compliance with its provisions. To this end, we
have participated in complaints regarding specific practices of others.
In addition, we have initiated new efforts to examine old or unclear
rules of G-ATT, with the intention of relating them more closely to
the experiences of recent years and the requirements of the future.
Compliance with the GATT
Review is presently underway in the GATT of several specific
actions or failures to act by other countries. The United States is
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16
participating through this multilateral forum to make sure that rules
and objectives of the GATT are followed by others as well. For exam-
ple, several countries-Brazil, Chile, and Israel-have revised their
tariff schedules and Austria and Spain have taken actions which
adversely affect American trade. The United States is negotiating
with these countries to obtain new concessions to offset the effect of
their actions. Should redress not be achieved through the avenue of
first recourse, the action may be advanced to a point where under
GATT, if ultimately unsatisfied, other nations would be permitted
to take specific and compensating trade measures to offset the losses
suffered from these unfair practices.
Bilaterally, we have insisted on compensation for any new trade
restrictive measures imposed on our exports even temporarily. For
example, Canada gave tariff concessions in agricultural trade as com-
pensation for the introduction of temporary special import charges
on imports of potatoes and corn into Canada.
Through the Organization for Economic Cooperation and Develop-
ment (OECD) in Paris in a matter closely related to the GATT, the
United States has initiated consultations to examine the trade effect
of forthcoming tax measures in the Netherlands and Belgium. In the
course of harmonizing the indirect tax system of the member countries,
within the Common Market, the Netherlands and Belgium will be
changing their indirect taxation from existing cascade tax assessment
to the turn-over, value-added system. In a similar move a year ago,
the Federal Republic of Germany achieved a significant trade benefit.
After World War II, in an effort to protect local industry and for-
eign exchange, many countries employed import quotas. As these in-
dustrial countries improved their economies and their international
balance of payments positions, they were able to assume the responsi-
bilities of nations with freely convertible currencies as described in
Article VIII of the Agreement of the International Monetary Fund.
A country may qualify as an "Article VIII country" without having
fully achieved the removal of all its quota restrictions; however, it is
the understanding of an Article VIII status that these restrictions
will be progressively removed over not too long a period of time.
For the most part, this has been done-but in nations such as France
and Japan quota restrictions (among others) linger. We started using
the GATT framework to achieve the removal of these restrictions
well before 1968 with respect to France. With respect to Japan, we
are presently negotiating bilaterally. In the summer of 1968, we suc-
cessfully obtained a relaxation of the Japanese restrictive trade prac-
tices with respect to our automotive trade and investment in that
country. Nevertheless, many other areas of our trade remain encum-
bered by restrictive Japanese practices. We are vigorously pressing
ahead to make this important market open and fair.
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17
A Fresh Look at Provisions of the GATT
At the GATT Minsterial Meeting in November 1967, it was agreed
that new Committees in industry and agriculture would be established
to examine nontariff barriers (NTB's) and other trade restrictions.
The rules, laws, administrative practices, commercial practices, and
preferences employed around the trading world are numerous, in-
sidious and always difficult to identify. Therefore, the first task was
to establish a useful if incomplete catalog of these nontariff barriers.
This has been accomplished. The GATT Committees are now turning
to the more difficult task of preparing for the negotiation of the reduc-
tion and removal of these nontariff barriers.
The normal objective in negotiating bilateral or multilateral trade
provisions is to achieve a neutral trade effect. This means that one
nation will agree to make an adjustment involving a certain amount
of trade, on the condition that another country makes a compensating
gesture involving an opposite and equal amount of trade. In negotiating
the removal of illegal nontariff barriers, this principle of balance must
be set aside. It is clearly unfair to have a country impose a nontariff
barrier and then, as a condition for its removal, demand a compensating
trade benefit.
At the November 1967 GATT Ministerial Meeting it was also agreed
to establish a Working Party on countervailing duties, export subsidies
and other export incentives. During the Kennedy Round negotiations,
many countries complained about the countervailing duty law of the
United States and its exemption from the provisions of the GATT.
This legislation, passed in 1896, requires the United States to impose
an equal and compensating import levy (countervailing duty) for an
export subsidy (bounty or grant) used by a foreign nation to aid its
exporters. This requirement to countervail is unrelated to the degree
of trade injury to the United States resulting from the foreign subsidy.
The GATT recognizes countervailing duty practices and the laws
that many countries have in this field. However, the GATT authorizes
a nation to countervail only to the extent that it is injured, and then
only after efforts to achieve removal of the export subsidy through
normal GATT procedures have failed.
In view of the 1947 GATT Agreement and our prior legislation, the
United States is not covered by the GATT provisions. The absence
of an injury requirement in our legislation is heavily criticized by
foreign countries-some call it a major United States nontariff barrier.
During the course of the Kennedy Round we agreed to discuss this
subject with other countries. This was in keeping with the tradition
that trading partners, when they have differences, should be willing to
discuss them freely. We have refused, however, to have our countervail-
ing duty law subjected to multilateral review, without simultaneous
detailed examination of export subsidies of other countries, which are
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18
the target of this statute. Unfortunately, more than a year of negotia-
tion has failed to reach agreement on the terms of reference of this
Working Party. The European Community has not found it possible to
agree to a basic examination of all export subsidies.
Progress in the review of border taxes received a boost from Presi-
dent Joimson's New Year's Day Message in which he called for both
short-term and long-term trade measures to improve our trading
position:
"American commerce is at a disadvantage `because of the tax
systems of some of our trading partners. Some nations give
across-the-board tax rebates on exports which leave their ports
and impose special border tax charges on our goods entering
`their country.
"International rules govern these special taxes under the Gen-
eral Agreement on Tariffs and Trade. These rules must be adjusted
to expand international trade further."
Border Tax Adjustments
In 1968 a new Working Party was established on the question of
border taxes.
The rules of the GATT permit goods sold for export to be relieved
of the indirect taxes the products would have borne if sold in domestic
markets. There is no such privilege pertaining to direct taxes. Im-
ported products are burdened with the domestic indirect tax. These
rules were established over twenty years ago, when indirect taxes
were low. In the late 1940's they were employed by relatively few
countries, and covered only a small portion of the volume of goods
traded internationally. With the rapid growth of world trade and
the increased revenue needs of the industrial nations, the use of
indirect `taxes broadened and their levels rose to rates undreamed
of in 1946. With regard to the experiences of recent years and the
requirements of the future, it is necessary to renegotiate the GATT
rules on border tax adjustments in order that they are more neutral or
equitable with respect to trade.
The United States undertook this effort when it requested GATT
in March 1968 to convene the Working Party agreed to in November,
1967. At t.he first meet.ing of the Working Party, last April 30, and iii
four subsequent meetings, the United States has explored, with its
trading partners, the history, the provisions, and the implications of
the existing GATT rules on border taxes. We have pointed out that
countries which employ primarily a system of direct taxation are
disadvantaged by the GATT trading rules, vis-a-vis countries that
employ indirect taxes significantly. We have argued that there is
absolutely no limitation under the existing rules of GATT on the
degree of border tax adjustments permitted for indirect taxes. We
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19
have also demonstrated a proliferation of these adjustments over the
past few years. Finally we have pointed to the changes that the future
will see in the adoption of indirect taxes by additional countries with
the explicit objective of obtaining the trading advantages offered by
the GATT rules on border taxes.
The United States delegation at the GATT has demonstrated that
changes in the form of indirect taxes can also have an effect upon the
patterns of trade. It is now clear that the provisions of the GATT lack
precision and, therefore, encourage interpretations which frequently
have the effect of improving a nation's trading position.
The time has now come to transcribe onr understanding and new
experience into constructive language in the G-ATT.
Temporary Border Adjustment for Balance of Payments
Purposes
The President's New Year's Day Message stated:
"In keeping with the principles of cooperation and consultation
on common problems, I have initiated discussions at a high level with
our friends abroad on these critical matters-particularly those na-
tions with balance of payments surpluses.
"These discussions will examine proposals for prompt cooperative
action among all parties to minimize the disadvantages to our trade
which arise from differences among national tax systems.
"We are also preparing legislative measures in this area whose
scope and nature will depend upon the outcome of these consultations."
In the days following President Johnson's message, Under Secre-
tary of State Ka.tzenbach, Under Secretary of the Treasury for Mone-
tary Affairs Deming, Ambassador Roth, the President's Special Trade
Representative, and Ambassador to the Organization for Economic
Cooperation and Development Trezise visited with officials of our
major trading partners in Europe to discuss the United States balance
of payments program. Under Secretary of State for Political Affairs
Rostow made a similar trip to Asia.
These emissaries in addition to describing the elements of our new
balance of payments program, emphasized the necessity of restoring
confidence in the exchange markets and the need for cooperative action
to support the international monetary system. They distinguished be-
tween the long-term effects to be achieved through negotiations in
the GATT on rules governing border tax adjustments and consulta-
tions with our trading partners to consider the best temporary
actions to improve the United States' trade account. In these extensive
consultations, we explored whether a temporary United States ex-
port rebate and import surcharge would necessitate or provoke simil'ar
measures by others which would have the effect of neutralizing the
benefits the United States was seeking.
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20
An alternative scheme was suggested by some which had the benefit
of demonstrating a responsive attitude and a multilateral approach
toward achieving short-term benefits to the United States trade ac-
count. This involved a proposed acceleration of the timing of the
Kennedy Round tariff cut.s by our trading partners and a deceleration
or postponement of the implementation of some of our own tariff cuts.
This acceleration/deceleration proposal appeared promising; however,
our trading partners linked the implementation of this scheme to
legislative approval of the elimination of the American Selling Price
(ASP) system of valuing certain chemicals and other goods for
customs duty purposes-an American nontariff barrier of sorts.
The acceleration/deceleration proposal was not implemented and
thus did not benefit our trade account in 1968. However, the principle
of multilateral consultations on short-term trade measures to meet
countries' temporary balance of payments problems was firmly estab-
lished.
This important principle was employed during the Group of Ten
Ministerial Meeting in Bonn in November 1968. The Federal Republic
*of Germany agreed to manipulate its border tax adjustments for the
explicit purpose of reducing its trade surplus by a substantial amount.
This was done in consultation with Germany's trading partners-and
with their approval. Another outcome of this meeting and of the
monetary crisis occurring at the time was a decision by the French
Government to alter its tax system and its border tax adjustments in
such a way as to benefit France's trading position, and thus to help
France meet her short-term balance of payments problems. This was
recognized to be an alternative during the course of the Bonn Meeting;
France's trading partners have accepted these temporary measures
designed to improve her trade account. In the circumstances, it is an
appropriate alternative to the more permanent effect created by a
change of parity.
The General Agreement on Tariffs and Trade in Article XII per-
mits a country with balance of payments problems temporarily to
employ direct measures to improve its balance of trade. These recent
actions by Germany and France are new examples of direct measures
that can be employed. The use of border tax adjustments by surplus
and deficit countries to help improve a temporary balance of payments
problem is an alternative preferable to quota restrictions and it could
develop into an appropriate additional temporary measure under
certain circumstances. Never substituting for appropriate fiscal and
monetary policy and perhaps other measures, short-term border ad-
justments can contribute to the workings of the process by which
balance of payments equilibrium is reestablished in a nation's accounts.
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IV. An Intensified Program to Moderate the Foreign Exchange
Costs of Government Expenditures Abroad for Security,
Development and Other Activities
A. Military
1. Measures to Reduce the Net Impact of Military Expendi-
tures Abroad
The Department of Defense has continued its efforts to minimize the
net impact of its expenditures on our balance of payments. (These
efforts were detailed in Tab B of the Treasury publication, "Main-
taining the strength of the United States Dollar in a Strong Free
World Economy," January, 1968.) Nevertheless, owing primarily to
the continuing Vietnam conflict and wage and price increases over-
seas, DOD expenditures continued to increase during 1968. This in-
crease, however, is expected to be markedly less than those experienced
during 1966 and 1967. Defense expenditures worldwide increased from
$3.8 billion in 1966 to $4.4 billion in 1967 and are expected to increase
by some $200 million in 1968 to a level of about $4.6 billion. These in-
creases have appeared largely in the Far East area. In Western Europe,
we expect to achieve a slight decrease in expenditures during the year;
nevertheless, these expenditures are still running at about $1.6 billion
annually.
In its efforts to restrain expenditure increases, DOD has continued
programs in effect prior to 1968. Construction and subsistence expendi-
tures abroad have been held down as a result of special efforts. In
addition, new programs were undertaken to reduce the number of
American civilians working overseas and the expenditures for official
travel overseas as a part of government-wide efforts in these areas.
During the year DOD also completed a redeployment of about 35,000
United States military personnel from Germany under previously
announced plans.
Special efforts also were made during this past year to limit the
foreign exchange impact of personal spending by American forces
and their dependents in Europe. Primarily, DOD has encouraged
individuals stationed overseas voluntarily to contain their spending
on the local economy and to increase savings. WTorking within these
guidelines, DOD undertook a general re-emphasis of its existing
voluntary programs relating to personal spending, including (a) an
expanded internal information program on the balance of payments
problem and DOD programs, reaching military and civilian personnel
(21)
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22
serving at home as well as overseas; (b) improved stocking of Ameri-
can goods in military exchanges overseas; (c) increased promotion of
the use of American sales facilities; (d) re-emphasis of American
controlled recreation facilities overseas; and (e) renewed emphasis
on current savings programs.
It is recognized, however, that owing to price increases overseas
as well as pay increases to American personnel, the ability of DOD to
achieve substantial reductions in personal spending overseas depends
primarily on the reduction of the number of personnel. Accordingly,
DOD has undertaken new efforts, particularly in the areas of reduc-
ing staffs in overseas headquarters and streamlining overseas support
and administrative operations 111 an effort to reduce the number of
persons employed overseas.
2. Actions to Offset United States Expenditures by En-
couraging Foreign Procurement in the United States of
Military Equipment
As a part of the Action Program, we have intensified our efforts,
particularly with the financially capable countries of Western Europe,
to enlist their balance of payments cooperation through procurement
of more of their defense needs in the United States. Additional mili-
tary sales arrangements were consummated with a number of countries
in Europe and elsewhere during the year. These sales will provide
balance of payments benefits to the United States during the next
several years. DOD receipts, stemming primarily from sales of mili-
tary equipment, will decline about $300 million from the 1967 level
but will nevertheless total approximately $1.2 billion on a global basis
in 1968. In 1967, our receipts benefited from an unusually high level
of payments from Germany to complete the existing offset
arrangements.
3. Financial Neutralization
In order to assist in further neutralizing the deficit on the military
account, we increased our efforts in 1968 to obtain special financial
arrangements, principally through sales of long-term United States
securities. We have made considerable progress in this area, par-
ticularly in Western Europe, and have commitments for about $1.4
billion of cooperation in this form from other countries this year.
If these materialize fully (through November about $1 billion had
been realized), we would reduce our net adverse balance in the mili-
tary account to about $2 billion. This would be an improvement of
over $600 million as compared to 1967. It should be noted, however,
that these special transactions cannot be regarded as a satisfactory
long-term solution to the deficit in our military account.
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23
Cooperation in the military portion of the balance of payments has
included countries in the Far East as well as Europe. However, we
have focused particular efforts in Europe, both bilaterally and within
NATO. In a broader sense, the United States has pursued with its
NATO allies the principles that the Alliance requires a foundation
of financial viability in addition to political and military strength,
and that the members of the Alliance should cooperate through ap-
propriate bilateral arrangements to deal with military balance of
payments problems. The communique at the NATO Ministerial Con-
ference in Brussels on November 16, 1968, specifically acknowledged
for the first time as a multilateral policy that such cooperation
strengthens the solidarity of the Alliance when it stated:
"They (the Ministers) also acknowledged that the solidarity of
the Alliance can be strengthened by cooperation between~mem----~
bers to alleviate burdens arising from balance of payments deficits
resulting specifically from military expenditures for the collec-
tive defense."
B. Development Assistance
On January 11, 1968, the President instructed the AID Admin-
istrator to reduce overseas expenditures in calendar year 1968 by a
minimum of $100 million below the 1967 level-or to less than $170
million. Preliminary estimates indicate that these expenditures will
in fact be in the neighborhood of $140 million in 1968-well below the
target figure for the year.
The President also instructed AID to review and improve the
effectiveness of the arrangements with individual countries to assure
that AID-financed goods shipped to recipient countries will be addi-
tional to commercial exports from the United States to those coun-
tries. The principle here is to assure that the AID program results in
a transfer of real resources rather than financial assets.
Our efforts to minimize the adverse balance of payments impact of
our bilateral foreign assistance programs are well established and
enjoy a high priority in our overseas foreign economic policy objec-
tives. We have been very successful in this area to date. These efforts
will have to be continued and reinforced wherever necessary.
In the future, we will have to place increased emphasis on assuring
that original AID financing leads to an adequate level of follow-on
commercial sales from the United States. This is primarily the re-
sponsibility of the American business community; however, it will
be necessary to develop better liaison between the AID field staff and
American exporters.
We have been pressing for policies and attitudes that give weight
to balance of payments considerations in multilateral development
activities. This year the Congress authorized a $300 million contribu-
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24
tion to the Fund for Special Operations of the Inter-American Devel-
opment Bank. Disbursement of these funds will be controlled in such
a way as to assure the ffnancing of American exports which would not
otherwise be financed. In addition, we have received assurances that
the ordinary capital funds of the 1DB will be managed so as to mini-
mize their adverse impact on the U.S. balance of payments. The
proposed International Development Association replenishment con-
tained similar balance of payments safeguards. Most significantly, a
good deal of progress has been made in 1968 in developing the capital
markets of other countries, particularly those with balance of pay-
ments surpluses, as a source of long-term capital for development
purposes.
The continuation of these balance of payments safeguards will be
an important factor in enabling the United States to contribute, in
full and fair measure, its share of the financial requirements of the
multilateral development institutions. The premise is becoming well
established tha.t multilateral development activities should give
adequate consideration to balance of payments factors, particularly in
the cases of deficit. countries. This premise supports the general pro-
position that the activities of these institutions should not be con-
ducted in a. manner which would exacerbate disequilibrium in inter-
national payments.
C. Reduction of United States Government Employees Stationed
Abroad
The Government announced the initiation of an extensive two-
pha.sed program-called "BALPA", short for "balance of payments"-
to reduce t.he number of people employed abroad by the United States
Government. Under BALPA, the number of direct hire Americans
stationed abroad is being reduced by approximately 4,000, or 18 per-
cent. The number of local employees is also being reduced by 4,000,
or 16 percent.
The present schedule is to have 75 percent of Phase I of this program
take place before the end of 1968, with the balance taking place in the
first six months of 1969. Of the reductions under Phase II, 75 percent
will take place before June 30, 1969, with the balance taking place in
the third quarter of 1969.
Balance of payments savings under Phase I will total approxi-
mately $20 to $22 million on an annual basis after completion of the
scheduled reductions. Completion of Phase II is expected to add addi-
tional savings of approximately $8 to $10 million per ye.a.r. The
balance of payments savings of the BALPA program have signifi-
cance beyond the amounts involved. Implementation of this program
will give evidence of the Government's determination to make its
own contribution to the over-all balance of payments program.
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V. An Intensified Effort for Temporarily Reducing Outflows of
Capital from the United States.
Private capital outflows from the United States have played a vital
role in the expansion of world trade and investment since World War
II. The United States has been a major source of funds for capital-
short areas; United States direct investment has helped to spread ad-
vanced technology and management skills; and our foreign invest-
ment has yielded good returns to the American investor and to the
balance of payments of the United States.
In the 1960's, however, the large flows of investment abroad has been
a major factor in the deficit of the United States. Although our net
private international investment position has risen substantially
throughout this decade, we have built up an increasingly high level of
liquid liabilities to foreigners while accumulating non-liquid long-
term investments overseas. This growing volume of liquid liabilities
has been one factor in the instability of the international monetary
system in times of stress.
The action measures on foreign investment announced January 1,
1968, struck directly at both `shorter and longer-run needs. The new
capital restraint programs were designed to strengthen the United
States balance of payments in a major way in 1968 through the reduc-
tion of capital outflows and increased reflow of earnings from foreign
investments. At the same time, the programs emphasized longer-
range goals-to give priority to high yielding investments and to
expanding American exports; to encourage the growth of European
capital markets; and to' assure the continuity of a liberal flow of direct
investment in the less developed countries and areas traditionally
dependent upon United States capital.
Direct Investment
The goal of the 1968 Foreign Direct Investment Program was to
reduce the `balance of payments deficit on direct investment `by $1
billion from the 1967 level. It appears that this mandatory program,
administered by the Department of Commerce, will reach this target
notwithstanding the exemption given to investment in Canada in
March 1968.
Over 3,000 firms have effectively complied with this program. The
regulations have not reduced the over-all level of foreign investment
by United States companies. In fact, the total will likely set a record
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high in 1968, thus providing a base for growing income from direct
investment in future years. This sustained level of overseas activity,
however, has been financed to a far greater extent from foreign sources
of capital. Indeed, United States firms will have raised this year close
to $2 billion of long-term capital from foreign sources, thereby reduc-
ing their transfers of funds from the United States a.nd their reliance
on reinvestment of foreign earnings. At the same time, firms will have
reduced their liquid balances held abroad and increased their remit-
tances of foreign earnings.
Tn 1969, there is a clear need to preserve the savings achieved in
1968. Therefore, on November 15, 1.968, the Secretary of Commerce
announced a continuation of the Foreign Direct Investment Program,
with modifications to adjust to the changing pattern of direct invest-
ment and the needs of American companies. Importantly, the pro-
gram will introduce foreign earnings as a criterion for increasing the
allowable direct investment of each company. It will also provide ad-
ditional flexibility for firms with limited or no foreign investment
experience; relieve inequities for companies that received investment
quotas unusually low in relation to direct investment earnings; remove
potential blocks to the growth of exports by American firms to their
foreign affiliates; and reduce some unique problems for special indus-
tries which became apparent in 1968.
Foreign Lending
The Federal Reserve voluntary program announced on January 1,
1968, set reduced ceilings on loa.ns from United States institutions to
foreign borrowers to achieve a net inflow of at least $500 million dur-
ing the year. Savings for the balance of payments were to be achieved
primarily by reducing outstanding United States bank credits to the
developed countries of continental Western Europe.
The foreign credit restraint program has continued to function
effectively in 1968. Banks reduced their foreign assets subject to the
ceilings by $469 million in the first quarter and by another $193 mil-
lion in the second quarter, compared with a target of $400 million for
the whole year. This early response to the Action Program contributed
greatly to the rapid improvement in the United States balance of pay-
ments in 1968 and thus to renewed stability and confidence in interna-
tional financiai markets.
For the year as a. whole, it is expected that banks will preserve most
of the savings of over $600 million achieved in the first ten months and
that they will meet the target for the year. The non-bank financial in-
stitutions in the first half also bettered the targeted savings-a reduc-
tion of $100 million of covered foreign assets. As in the case of the
Department of Commerce program, these savings were achieved with-
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out major dislocation of trade and investment. Here again, the rapidly
growing international capital market has proved an effective alterna-
tive source of both bank loans and long-term investment funds.
In view of the necessity to preserve the savings achieved in 1968,
the Federal Reserve Board has announced a continuation of the
voluntary credit restraint program for the coming year. The basic
ceilings on foreign lending will be maintained, and the guidelines will
continue:
-to encourage lending institutions to give priority to export credits
and loans to less developed countries in the use of any leeway;
-to ask banks not to renew or replace maturing term loans to con-
tinental Western Europe; and
-to provide leeway for banks to participate in export credits sup-
ported by agencies of the United States Government.
Interest Equalization Tax
In July, 1967, the lET was extended for two years with discretionary
authority for the President to vary the rate of tax. In 1968, the rate
was maintained at the level of 11/4 percent per annum, less than the
permissible maximum. It served effectively to place a premium for
American investors on portfolio investments and term loans to de-
veloped countries. This effective deterrent continued when interest
rates in the United States and in other major capital markets gradually
declined from the excessively high levels brought about by the crisis
in international financial markets in late 1967 and early 1968.
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VI, A Long-Range Program for Promoting Foreign Private
Investment in United States Securities
Foreign investors have dramatically increased their net purchases
of American corporate debt and equity issues since 1964. Net inflows
(excluding liquidations by the LTnited Kingdom) increased from $147
million in 1965 to $783 million in 1966 and to nearly $11/2 billion in
1967. Through the first three quarters of 1968 these purchases have
increased to a record level of about $31/2 billion at an annual rate.
The promotion of foreign purchases of American securities has
been an important part of the Government's program to improve the
balance of payments since 1963. An Industry-Government Task Force
in 1964 recommended a series of specific steps to increase inflows of
foreign investment~ capital. One of the key elements in the recoin-
mended program called for revisions of the Internal Revenue Code
to improve the tax status for foreign investors in the United States.
Enactment of the Foreign Investors Tax Act of 1966 accomplished
this goal. This was followed by a series of actions by variOus groups
designed to provide foreign investors with better information on in-
vestment conditions in the United States.
A special industry group has also sponsored visits to the United
States by key foreign investment decision-makers, in order to assist
them in contacting policy-level officials in both industry and* govern-
ment. In addition, various segments of the American securities
industry have expanded their contacts with foreign investment
organizations by establishing new offices overseas and by devoting an
increasing amount of attention to servicing the needs of foreign
investors.
In addition, the Government has sought to develop a responsible
fiscal and monetary policy which will insure the stability and con-
tinued growth of the economy of the United States in order to retain
the confidence of foreign investors. These efforts have contributed
importantly to improvements in the balance of payments, in general,
and especially to the establishment of an improved two-way flow of
investment capital between the United States and Europe.
Given the substantial increase in net volume of foreign funds flow-
ing into American securities over the past several years, the extent to
which this renewed interest by foreigners remains permanent will be
important.
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Foreign investors typically point to the relative technological su-
periority of the large American corporations, many of which are, in
fact, international corporations headquartered in the United States.
The high rates of earnings and reinvestment for continued growth by
these firms are key reasons for renewed European interest in American
coporate securities. The United States remains the largest single mar-
ket in the world, with a strong steady growth rate equal to or better
than that of most industrialized countries, and a tradition of political
and social stability which seems increasingly crucial to investors in
these days of national and international instability elsewhere. Inves-
tors see the United States as an eminently secure economy in which
to hold a portion of their investment portfolios-both safely and
profitably.
In addition, the basic features of the American securities market
continue to be attractive to foreign investors. These features are the
size of the equities market, the availability of information on corpo-
rate activities, and the added touch of credibility due to the efforts of
the Securities and Exchange Commission and the work of the ex-
changes to police themselves.
In order to sustain investment inflows from abroad, we must insure
that the American economy, both domestically and in terms of its
international impact, continues its steady advance. This requires con-
tinuation of the Administration's programs to achieve growth with
price stability at home and to maintain worldwide confidence in the
dollar as a long-term investment vehicle as well as a fundamental
transactions currency underlying international trade and payments.
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VII. A Long-Range Program for Narrowing the Travel Gap
Through Promotion of Foreign Travel in the United States
and Temporary Measures to Reduce Travel Outlays
Abroad by United States Residents
Results of our efforts to reduce the travel gap in 1968 have been
disappointing. Although complete data will not be available until
early next year, it seems clear that we will not reach our goal of saving
$500 million on the tourism account.
We have been more successful in implementing our long-range pro-
gram to stimulate foreign travel to the United States than we have
been in containing American travel abroad. Most recommendations
made in the February report of the Industry-Government Special
Task Force on Travel have been put into effect. Some, however, includ-
ing the waiving of visa requirements for temporary visitors to the
United States have not yet been implemented. Full implementation
of all recommendations must be achieved before the United States can
be said to have a meaningful program designed to attract foreign
travelers to this country.
The Administration's short-term efforts to secure legislation in the
Congress to reduce the outflow of tourist dollars abroad in 1968 were
not successful. A bill reducing Customs exemptions and establishing
a 5 percent ticket tax on international air travel passed the House of
Representatives in June but failed to pass the Senate. The Adminis-
tration's proposal to levy a graduated expenditures tax was not re-
ported out by the House WTays and Means Committee.
On July 31, Secretary Fowler sent a letter to Senator Long, Chair-
man of the Senate Finance Committee, in which he proposed a method
whereby the short-term and long-term efforts of the United States to
reduce its chronic travel deficit could be combined. Under the proposal,
a portion of the proceeds from the proposed ticket and expenditure
taxes would be used, up to a limit of $30 million per year over a five-
year period, to fund our long-range effort to increase foreign travel
to the United States. In this fashion, the proposed taxes would take
on a dual character. In addition to accomplishing an immediate
balance of payments saving by prompting American travelers abroad
to keep their expenditures within reasonable bounds, the law would
also constitute a positive measure to promote tourism to the United
States. Both steps are necessary to bring our travel deficit within a
manageable range. Funding the long-range travel program with reve-
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nues raised from the short-term program should be the cornerstone
of future United States programs in this area.
In summary, our progress in the travel area has been one of the
most disappointing parts of our 1968 balance of payments program.
We believe that the basic premises upon which we based our legislative
recommendations to the Congress in 1968 are still valid, and that they
will remain so in 1969. In the absence of meaningful measures to re-
duce the travel gap, we may well have an annual travel deficit of $4
billion by 1975. The best way to reduce the travel gap is to encourage
increased foreign travel to the United States. An adequately financed
promotional program is, however, a sine qua non for achieving this.
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VIII. Adjustment Responses Expected of Trading Partners
During 1968 the international payments pattern has been subject
to large and, to some extent, unusual capital movements. During the
first quarter these were associated with the large-scale speculation in
gold. During the second and third quarters the French franc felt the
impact of large-scale capital outflow, following the labor and student
disturbances in May. The United States was the recipient of sub-
stantial inflows of capital for the purchase of portfolio stocks, and
from large-scale borrowing from the Euro-dollar market by the
American commercial banking system.
At the same time, the combined current balance of payments surplus
of the European Community countries as a group appears to have in-
creased even above the extremely high level of 1967, when it amounted
to $414 billion. Italy's current account surplus rose to nearly $21/2
billion, and Germany's to perhaps $23/4 billion. The German trade
surplus was again particularly striking, at about $4 billion a year
with imports figured to include insurance and freight, or over $5
billion a year on a basis comparable to that used in United States
trade figures.
These figures are cited to give some indication both of the imp6r-
tance of these large trade surpluses in sustaining the domestic econo-
mies in these two countries, and at the same time making it much more
difficult for the United Kingdom and the United States t.o achieve
an improvement in their trade and current accounts.
These developments in the current and capital accounts have led
to questioning as to whether an adjustment pattern can be based over
a longer period of time on an extremely high trade and current.
account surplus in the European Community, offset by a very large
outflow of capital in the form of banking funds and portfolio invest-
ments. Partly because of the substantial reserve losses of the French,
the European Community countries actually recorded a decline in
reserves of $1.1 billion in the first half of 1968, following a number of
years in which these countries regularly added to their reserves at
the rate of nearly $11/2 billion a year. This very substantial swing
indicates the very large size~ of capital movements that can occur
in a relatively short time when a currency comes under pressure.
Because of these capital movements, the dollar has been strong iii
the exchange market, and the United States has had a substantial
official transactions surplus in 1968, as against a deficit measured on
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this basis of $3.4 billion for the entire year 1967. However, this struc-
ture of international payments may be vulnerable in the future. For
example, if the German economy should begin to show signs of infla-
tion, a tighter monetary policy would be likely to exert an especially
strong restraining effect upon the purchases of foreign bonds, which
have been quite large in 1968, and on investments in foreign money
markets by the German commercial banking system. The equilibrating
capital outflow would then decline much more rapidly, in the event of
a German boom, than the corresponding reduction in the German
trade surplus as domestic consumption of imported goods increased.
The ideal situation would be for the German and Italian economies
to expand while avoiding a resumption of inflationary pressures are to
base the expansion upon domestic demand factors, relying less upon the
impetus to the domestic economy of the extremely large current and
trade surpluses. The Italian economy could make effective use at home
of the substantial amounts of real goods that are now being shipped
abroad and financed by the export of capital. In fact the Italian au-
thorities recognize that an equilibrium on current account as well as
capital account is a desirable objective for Italy. The German authori-
ties took steps in November to reduce the large current account sur-
plus, although they still rely heavily on capital exports to avoid a rise
in German reserves.
In sum, the first three quarters of the year 1968 have been marked
by capital movements that have tended to strengthen the position of the
dollar, as against earlier periods, although this has been partly asso-
ciated with strain on the Franch franc. More attention is beginning
to be devoted to the more deep-seated and difficult problem of achiev-
ing a pattern of trade surpluses and deficits that will be regarded inter-
nationally as more satisfactory than the present concentration of strong
current account positions in the European Community countries, apart
from France.
It is therefore to be hoped that the Continental surplus countries
will find ways of relying to a larger extent upon domestic demand,
rather than on foreign demand for their products, in maintaining the
strength of their economies. Greater reliance on domestic demand
would represent an important contributidn by the surplus countries to
the balance of payments adjustment process.
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