the generals and admirals the money we are talking about as far as public service jobs they would get the ships out of the mothballs, they would get the tanks out of the sandlots, they would get the uniforms out of the storage houses, they would refurbish the barracks just like that, and we would have them all employed. But when we get around to OMB and CEA and the social agencies that we have, everybody is going to collect social security before we ever get them around to getting them working on getting jobs at least according to what Paul MacAvoy said yesterday. I didn't think about that Pentagon thing until last night and about how quickly they get people on when they want them. It is amazing. Even if you don't register them anymore, they get them just like that. Now would you like to comment?

STATEMENT OF HON. JAMES T. LYNN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, ACCOMPANIED BY PAUL H. O'NEILL, DEPUTY DIRECTOR; DALE R. McOMBER, ASSISTANT DIRECTOR FOR BUDGET REVIEW; AND RUDOLPH G. PENNER, DEPUTY ASSOCIATE DIRECTOR FOR ECONOMIC POLICY

Mr. LYNN. Mr. Chairman, you have given me pretty good general questions.

Chairman HUMPHREY. You're so good at it.

Mr. LYNN. It is a little unusual to have the questions come at the front end rather than as we move along.

Chairman HUMPHREY. I thought we would get the relevant testi

mony.

Mr. LYNN. I would be happy to take the whole agenda and go right through it. My prepared statement was a little shorter I'm afraid than yours.

Chairman HUMPHREY. My point was that I was worried that you weren't going to get at the essential questions in your prepared

statement.

Mr. LYNN. Mr. Chairman, I think you know

Chairman HUMPHREY. There are lots of teams in Washington and I want to tell you something: There is nothing like a wide receiver and a long-range passer with a Hail Mary. [Laughter.]

Mr. LYNN. Yes, sir, I prefer to think that you needed a combination. And that is usually what makes a victorious team. I think that is what we have. I think we have a combination of players that spells victory.

I would ask that my prepared statement be put in the record. Chairman HUMPHREY. Yes.

Mr. LYNN. And that President Ford's budget message be included in the record, which is the shortest message I think in a long time, but I think it is an important one.

Chairman HUMPHREY. Fine.

[The prepared statement of Mr. Lynn and the budget message of the President follow:]

PREPARED STATEMENT OF HON. JAMES T. LYNN

Mr. Chairman and Members of the Committee, the President has presented his State of the Union Message. He has also submitted his budget. By these actions, the President has set before the Congress and the people of America both his aspirations for our country and his specific proposals to translate these aspirations into reality.

The President's Budget Message is very short. But since those four pages are so crucial to a full understanding of the budget-an understanding of the President's views on budget objectives and on the ways budget decisions should be made I respectfully request that, rather than my attempting to paraphrase, the Budget Message be incorporated in the record at this point.

Mr. Chairman, we would be pleased to answer your questions.

BUDGET MESSAGE OF THE PRESIDENT

To the Congress of the United States:

The Budget of the United States is a good roadmap of where we have been, where we are now, and where we should be going as a people. The budget reflects the President's sense of priorities. It reflects his best judgment of how we must choose among competing interests. And it reveals his philosophy of how the public and private spheres should be related.

Accordingly, I have devoted a major portion of my own time over the last several months to shaping the budget for fiscal year 1977 and laying the groundwork for the years that follow.

As I see it, the budget has three important dimensions. One is the budget as an element of our economic policy. The total size of the budget and the deficit or surplus that results can substantially affect the general health of our economy-in a good way or in a bad way. If we try to stimulate the economy beyond its capacity to respond, it will lead only to a future whirlwind of inflation and unemployment.

The budget I am proposing for fiscal year 1977 and the direction I seek for the future meet the test of responsible fiscal policy. The combination of tax and spending changes I propose will set us on a course that not only leads to a balanced budget within three years, but also improves the prospects for the economy to stay on a growth path that we can sustain. This is not a policy of the quick fix; it does not hold out the hollow promise that we can wipe out inflation and unemployment overnight. Instead, it is an honest, realistic policy -a policy that says we can steadily reduce inflation and unemployment if we maintain a prudent, balanced approach. This policy has begun to prove itself in recent months as we have made substantial headway in pulling out of the recession and reducing the rate of inflation; it will prove itself decisively if we stick to it.

A second important dimension of the budget is that it helps to define the boundaries between responsibilities that we assign to governments and those that remain in the hands of private institutions and individual citizens.

Over the years, the growth of government has been gradual and uneven, but the trend is unmistakable. Although the predominant growth has been at the State and local level, the Federal Govrenment has contributed to the trend too. We must not continue drifting in the direction of bigger and bigger government. The driving force of our 200-year history has been our private sector. If we rely on it and nurture it, the economy will continue to grow, providing new and better choices for our people and the resources necessary to meet our shared needs. If. instead, we continue to increase government's share of our economy, we will have no choice but to raise taxes and will, in the process. dampen further the forces of competition, risk, and reward that have served us so well. With stagnation of these forces, the issues of the future would surely be focused on who gets what from an economy of little or no growth rather than, as it should be, on the use to be made of expanding incomes and resources. As an important step toward reversing the long-term trend, my budget for 1977 proposes to cut the rate of Federal spending growth, year to year, to 5.5%-less than half the average growth rate we have experienced in the last 10 years. At the same time. I am proposing further, permanent income tax reductions so that individuals and business can spend and invest these dollars instead of having the Federal Government collect and spend them.

A third important dimension of the budget is the way it sorts out priorities. In formulating this budget, I have tried to achieve fairness and balance: Between the taxpayer and those who will benefit by Federal spending; Between national security and other pressing needs;

Between our own generation and the world we want to leave to our children; Between those in some need and those most in need;

Between the programs we already have and those we would like to have; Between aid to individuals and aid to State and local governments;

Between immediate implementation of a good idea and the need to allow time for transition;

Between the desire to solve our problems quickly and the realization that for some problems, good solutions will take more time; and

Between Federal control and direction to assure achievement of common goals and the recognition that State and local governments and individuals may do as well or better without restraints.

Clearly, one of the highest priorities for our Government is always to secure the defense of our country. There is no alternative. If we in the Federal Government fail in this responsibility, our other objectives are meaningless.

Accordingly, I am recommending a significant increase in defense spending for 1977. If in good conscience I could propose less, I would. Great good could be accomplished with other uses of these dollars. My request is based on a careful assessment of the international situation and the contingencies we must be prepared to meet. The amounts I seek will provide the national defense it now appears we need. We dare not do less. And if our efforts to secure international arms limitations falter, we will need to do more.

Assuring our Nation's needs for energy must also be among our highest priorities. My budget gives that priority.

While providing filly for our defense and energy needs, I have imposed upon these budgets the same discipline that I have applied in reviewing other programs. Savings have been achieved in a number of areas. We cannot tolerate waste in any program.

In our domestic programs, my objective has been to achieve a balance between all the things we would like to do and those things we can realistically afford to do. The hundreds of pages that spell out the details of my program proposals tell the story, but some examples illustrate the point.

I am proposing that we take steps to address the haunting fear of our elderly that a prolonged, serious illness could cost them and their children everything they have. My medicare reform proposal would provide protection against such catastrophic health costs. No elderly person would have to pay over $500 per year for covered hospital or nursing home care, and no more than $250 per year for covered physician services. To offset the costs of this additional protection and to slow down the runaway increases in federally funded medical expenses, I am recommending adjustments to the medicare program so that within the new maximums beneficiaries contribute more to the costs of their care than they do now.

My budget provides a full cost-of-living increase for those receiving social security or other Federal retirement benefits. We must recognize, however, that the social security trust fund is becoming depleted. To restore its integrity, I am asking the Congress to raise social security taxes, effective January 1, 1977, and to adopt certain other reforms of the system. Higher social security taxes and the other reforms I am proposing may be controversial, but they are the right thing to do. The American people understand that we must pay for the things we want. I know that those who are working now want to be sure that money will be there to pay their benefits when their working days are over.

My budget also proposes that we replace 59 grant programs with broad block grants in four important areas:

A health block grant that will consolidate medicaid and 15 other health programs. States will be able to make their own priority choices for use of these Federal funds to help low-income people with their health needs.

An education block grant that will consolidate 27 grant programs for education into a single flexible Federal grant to States, primarily for use in helping disadvantaged and handicapped children.

A block grant for feeding needy children that will consolidate 15 complex and overlapping programs. Under existing programs, 700,000 needy children receive no benefits. Under my program, all needy children can be fed, but subsidies for the nonpoor will be eliminated.

A block grant that will support a community's social service programs for the needy. This would be accomplished by removing current requirements unnecessarily restricting the flexibility of States in providing such services.

These initiatives will result in more equitable distribution of Federal dollars, and provide greater State discretion and responsibility. All requirements that States match Federal funds will be eliminated. Such reforms are urgently needed, but my proposals recognize that they will, in some cases, require a period of transition.

These are only examples. My budget sets forth many other recommendations. Some involve new initiatives. Others seek restraint. The American people know that promises that the Federal Government will do more for them every year have not been kept. I make no such promises. I offer no such illusion. This budget does not shrink from hard choices where necessary. Notwithstanding those hard choices, I believe this budget reflects a forward-looking spirit that is in keeping with our heritage as we begin our Nation's third century. GERALD R. FORD.

JANUARY 21, 1976.

Chairman HUMPHREY. Will you please identify your associates. Mr. LYNN. On my right over here is my right arm Paul O'Neill, Deputy Director; on my left is what I call control central at OMB, Dale McOmber, who is Assistant Director for Budget Review; and on my far left is Rudy Penner who is my Deputy Associate Director for Economic Policy and works closely with Alan Greenspan and the Council of Economic Advisers.

Chairman HUMPHREY. These men should feel free to also respond to any questions.

Mr. LYNN. Indeed, yes. I feel very comfortable having them surrounding me.

The initial comment that you made is that the budget addresses neither of the problems of inflation or jobs. We believe it addresses them in a very straightforward, honest, effective way. I think what the President has done is said that we do need to have some stimulus in the economy at this time. We can't go from a $76 billion estimated deficit in fiscal 1976 to a balanced budget and expect the economy to do well under those circumstances. He said in October of last year that he believed a deficit in the range of $40 billion to $44 billion made sense. And his budget provides for a deficit of $43 billion. We are on the way to achievement of a goal of a balanced budget in fiscal year 1979.

Now the key difference between us that emerges from your comments, Mr. Chairman, is that you feel that if there is to be stimulus, the way that stimulus should be provided, in the main, is by the Government doing things-by the Government providing jobs, by the Government putting in this and that program, by the Government adding at least enough to cover inflation and spending a least at current services levels.

We recognize needs as they exist today. We can discuss a little later the unemployment program. The President's proposals in that regard have been up here for over 5 months. It seems to me the approach that we think is appropriate is a balancing between trying to take care of the people that are unfortunately unemployed-and they cover a spectrum of different kinds of people; there is no monolithic group here, for the unemployed cover the whole spectrum-and, on the other hand, using the private sector to provide the kinds of real rewarding permanent jobs, and jobs with choice. that we think that the American people want to have.

Now you mentioned that the President's budget increases by 5.5 percent and it is somewhat lower if you take out the Export-Import Bank. I wasn't clear what else you were taking out to get that figure down to about 4 percent. What was it?

Chairman HUMPHREY. Oh, a year-by-year adjusting for the transition quarter.

Mr. LYNN. Oh, you were adjusting for the transition quarter? Chairman HUMPHREY. Yes.

Mr. LYNN. I wish you luck in trying to make that adjustment. We tried to face up to that problem in the Budget in Brief and said that the increase year to year was 5.5 percent and even less at an annual rate if the transition quarter is taken into account. But to try to come up with precise figures when you are dealing with a transition quarter that has seasonal aspects to it-which any quarter of the year does both on receipts and expenditures-is extremely difficult. We certainly will concede that when you take the transition. quarter into account, the annual growth rate is something less than 5.5 percent.

Chairman HUMPHREY. You said that at the proper time, Mr. Lynn, I think.

Mr. LYNN. We did say that, as a matter of fact, in the Budget in Brief, and made that clear.

Chairman HUMPHREY. The figure that stands out is 52 percent. Mr. LYNN. And the figure is accurate for the year-over-year change: Fiscal year 1976 and fiscal year 1977, year over year. Chairman HUMPHREY. What do you do with those 3 months? Mr. LYNN. Counting the 3 months, we say in the Budget in Brief it is even less, if you take the transition quarter into account, Mr. Chairman.

Chairman HUMPHREY. Could you estimate on that since you made estimates on everything else?

Mr. LYNN. I tried, sir. There is no good way of doing it.

Chairman HUMPHREY. We tried and we came up with that rate. Mr. LYNN. Well, then we will work out numbers with you, and we will come in with them.

Chairman HUMPHREY. That is all right.

[The following information was subsequently supplied for the record:]

If one assumes that there are no seasonal aberrations that occur in the transition quarter, the growth in outlays from fiscal year 1976 to fiscal year 1977-excluding the effect of adding Export-Import Bank outlays to the 1977 outlay total-would be about 4 percent.

Mr. LYNN. But going on, it is true that this is a budget that tries to moderate the growth in the Federal sector. There is no doubt about that. In fact, it is a pivotal point in the President's program. We really do believe that we should start toward getting to a balanced budget in 1979. At the same time we are moderating the growth in Federal expenditures to make room for tax reductions in this coming year, and perhaps again within 2 or 3 years. We really do believe the time has come to start reemphasizing the private sector.

You know you mentioned your drug company. I think that is an excellent example that what really holds back the private sector is, in