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THE 1976 ECONOMIC REPORT OF THE PRESIDENT

THURSDAY, JANUARY 29, 1976

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CONGRESS OF THE UNITED STATES,
JOINT ECONOMIC COMMITTEE,

Washington, D.C. The committee met, pursuant to recess, at 10:05 a.m., in room 318, Russell Senate Office Building, Hon. Hubert H. Humphrey (chairman of the committee) presiding.

Present: Senators Humphrey, Proxmire, Kennedy and Javits; and Representatives Bolling, Reuss, Hamilton, Brown of Ohio, Brown of Michigan, and Rousselot.

Also present: John R. Stark, executive director; Richard F. Kaufman, general counsel; Loughlin F. McHugh, John R. Karlik, Courtenay M. Slater, William A. Cox, L. Douglas Lee, and Ralph L. Schlosstein, professional staff members; Michael J. Runde, administrative assistant; George D. Krumbhaar, Jr., minority counsel; and M. Catherine Miller, minority economist.

OPENING STATEMENT OF CHAIRMAN HUMPHREY Chairman HUMPHREY. This morning ladies and gentlemen, we are pleased to have as our witness Mr. James T. Lynn, the Director of the Office of Management and Budget. And, of course, we will discuss with Mr. Lynn the President's budget, his economic proposals for the coming fiscal year. I might say that none of us say it is an easy assignment to be in charge of a budget presentation. While our questions may seem pointed, they carry with them always a note of sympathetic understanding. So I thought we would preface today's hearing with that caveat.

The President has stated, and I think we all agree, that two major economic problems facing our country today are unemployment and inflation.

Frankly, I must say that as I view the budget particularly in terms of its overall outline and categories, this budget addresses neither of these problems in a significant way. As we examine the many individual pieces of this proposed budget, the central focus of our examination should be to determine how each of these many pieces or line items will affect the major problems of unemployment and inflation.

I have to say again that the question isn't whether or not you have $350 billion or $395 billion or $400 billion or whatever it is. The question is, What does the budget do to get at the problems that

afflict the economy? Obviously we all have our separate approaches. Some people are deeply concerned about fiscal stimulus because they are worried that it will reignite or further extend the flames and the size of inflation.

There are others that are of the opinion that the fiscal stimulus is necessary and that because of the unused plant capacity, the lack of demand, that the dangers of inflation due to decreased employment, are not nearly as significant as some would paint them.

I think we need to establish the fact that, in general, this budget proposal does represent a reduction in Government services. There are several ways to arrive at this conclusion but the simplest way is to just take a plain look at the figures.

The President has said that he is restricting the growth of the budget to 512 percent. I suggest that this is an overstatement. If you adjust the total and include the Ex-Im Bank, which was formerly excluded by law, and make a comparison on a year over year basis, as we normally do, the growth in expenditures proposed in this budget is about 4 percent.

I would like, Mr. Lynn, you to address yourself to that at the appropriate time. The administration has projected price increases at about 6 percent. That 2-percent gap means fewer Government services. I would like to know how this general policy aids in the fight against inflation and unemployment.

Another way to look at the budget is to compare it to the current services budget, which by the way was analyzed by the committee some months ago. Now this was an estimate by your staff, by the committe's staff, and by the Congressional Budget Office. And there seems to be general agreement that we would need to spend something between $420 and $425 billion in fiscal 1977 to provide the same level of services as is in fiscal 1976. Now we are not necessarily recommending that, but the staff studies by the OMB and the CBO and the JEC seem to indicate that something in the range of $420 to $125 billion in fiscal 1976 would be required by the same level of services as in fiscal 1976. If I am in error on that, I would like to have you correct the record.

This means that the President is proposing a $25- to $30-billion cut in services. Again, I must ask how this policy aids in the fight against inflation and unemployment.

Turning to specific proposals made in this budget, I find it is even more difficult to understand the President's reasoning when you look at the twin evils or twin problems of inflation and unemployment. The employment policies as outlined in the budget seem to me just incredible. You would reduce the summer youth program by 170.000 jobs and reduce the emergency public service employment by 260,000 jobs. There are 165,000 people now receiving extended unemployment compensation benefits and they would become ineligible, and 290,000 would be eliminated from special unemployment benefits. I would like to know how much the welfare roles will be increased by the employment policies proposed in this budget. I want to say that the League of Cities and the Conference of Mayors and the National Association of County Officials are

urbed over the use it is veract they ar

deeply disturbed over the figures and their interpretation of this aspect of the budget. Because it is very clear that the costs of welfare are skyrocketing at local levels. In fact they are breaking the back of many county governments and city governments and posing a very heavy burden on State governments.

In other words, there is a transfer of costs away from the Federal to the local with the local governments being compelled to lay off the employees at the same time the Federal Government is hiring them under CETA, which to me is just plain stupid. I guess that is a tough word but it is right. I was in New York City when we held a hearing there and some of my colleagues were there. CETA had a program to train and employ 16,000 employees as the city was going to layoff 75,000 employees. That is a sure way to have a problem.

Last year we spent $9.3 billion on medicaid. This budget proposes combining medicaid with 15 other programs and spending a total of $9 billion. I may be in error, and again if I am you must correct me and our staff because I don't want our figures to be in error, but those are my figures.

The increased costs to all elderly patients proposed for medicaid would far extend the benefits a few would receive from catastrophic insurance. I might take note of the fact that the category of people in the American economy that are the poorest of the poor are the elderly by far. And anything that increases their costs is placing a burden upon these least able to pay it.

Tightening food stamp administration would reduce the number of beneficiaries by over 5 million. I can assure you the Committee on Agriculture and Forestry, which I am privileged to be a member, is redoing the entire food stamp program. We will be making appropriate changes to tighten it up.

On the tax side, the President has proposed increasing the two taxes that go directly into employers' costs of labor; and that is the social security tax and the unemployment compensation tax. These two tax increases would largely offset the tax reductions the President has requested—I think about halve the tax reductions that the President has requested. I would therefore like you to explain to this committee how increasing wage costs, which surely social security tax does, or the unemployment compensation tax, how increasing these wage costs will help either inflation or unemployment. And I mention this particularly at a time of very fragile recovery but hopefully real recovery.

În summary, Mr. Lynn, I would repeat my original conclusion that this budget does little or nothing to address the two major problems facing us today—inflation and unemployment. It may address itself to the problem of deficit at the Federal level only to increase costs of Government at the local level, which is nothing more or less than a Mexican bean game that shifting the bean to the person who can least afford it and have the least capacity to digest it. Therefore I look forward to having you show me that these conclusions are not well-founded because I think all of us ought to make sure that we don't exacerbate our situation.

Yesterday I had some exchanges with our old friend, Mr. Greenspan, about the jobs. Mr. MacAvoy was here with us and gave us a dissertation on how it was difficult it was to make a job program work. I thought about this a lot. In fact I talked to Mr. Greenspan last night in the pleasant atmosphere of the Press Club. But I just still can't figure out why it is so difficult to put people to work. That always kind of makes me wonder whether we have gotten ourselves so overorganized that we don't know what to do. And so overorganized that we will be finding out we won't be able to open a door after awhile.

I know it does not take much time to hire anybody. In our little business we hired new employees over Christmas. It wasn't difficult at all and we just hired them. The only problem we had was filling out the Government forms. That takes a special accountant. Then after Christmas we didn't have any difficulty laying them off. We didn't need them. Really it wasn't a problem. I just don't understand it. If you are in business, there is no problem at all in it; the only problem there is is filling out the Government forms. Humphrey Drug, Inc., has no problem at all hiring and firing.

And as mayor of Minneapolis I had no problem at all. I had a public service employment program, believe it or not, right after the war when we thought there was the danger of recession and we didn't have a problem. We got money in from the city and money from the county and we just hired and put them right on the government payroll just like that. No problem. After awhile we found out we didn't need them all so we let them go. No problem. We had the same thing with housing. I didn't have a public housing authority in the city of Minneapolis. I had 8,000 veterans that returned to my city with no place to live. I just went out and got some trailers and I went and got some pre-fabs and we put them up. We did it all in less than 6 months. There wasn't any problem.

I'm going to ask the Office of Management and Budget to show us how to put a job program together where you have more people working on the jobs than you have people preparing the job forms. That is going to be a real zinger.

Mr. Lynn, I think you are a practical man. I think you can do it. You and I have had our differences but I have a high regard for you. And I bet if I turned it over to you and said, “We would like to employ 500,000 people in the next 9 months,” I bet you would find a way to do it. If not, give it to the Pentagon. They know how to put people in the Army. I decided they ought to turn the whole Government over to them. There is a reason for it. First, they get more money than anybody else. Second, they can put more people to work than anybody else and they don't overwork them when they do put them in, so there would be no social strains. Third, they know how to get the benefits after they have had to work so nobody would suffer. I would suggest to my colleagues on the committee, if it doesn't sound like I am embellishing the military complex, that we ought to take the social agencies and just do away with them and turn all this over to the generals and admirals. If you give

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