relatively new Congressional Budget Office and Budget Committees of the Senate and the House.

I submit in all seriousness that the primary purpose of a Federal Budget is not to be balanced. It could be balanced at zero levels of outlays and tax collections, or 25 billion dollars of each, or at any other level of each. Nor is it the primary purpose of Federal outlays to be used for stabilization purposes, and thus to be expanded rapidly when the economy is excessively slack, and contracted when the economy is under excessive strain (a situation which we have not had in general at any time since the passage of the Employment Act of 1946, except perhaps during a portion of the Korean war period). The notion that the Federal Budget on the outlay side should be expanded rapidly to stimulate the economy, or contracted to fight inflation, is in my view not fully responsive to the teachings of Lord Keynes; and whether or not it is a distortion of his teachings, it is wrong nonetheless.

For the true and obvious purpose of the outlay side of the Federal Budget is to serve national priorities, i.e., to do for the economy and the people what cannot otherwise be done or done so well. In short, the Federal Budget should allocate to these priorities the needed goods and services which would not otherwise be so allocated, or so allocated with equal efficiency in terms of true costs. It follows that the outlay side of the Federal Budget should be determined within the perspective of a full employment and balanced growth plan for the overall economy. The Humphrey-Hawkins bill so provides.

Equally important is a principle hardly recognized now in the application of public policy or by most economists. The quantitative allocations to the various categories within the Federal Budget should almost always be determined by what the economy needs and can support at reasonably fully resource use. When the economy is far below full resource use, the outlay side of the Federal Budget should not be reduced accordingly, on the alleged ground that we "cannot afford" to meet the priority needs which Budget outlays serve. Vast idleness of manpower and other productive resources does not mean that we do not have the real resource capabilities to serve these priorities fully through the Federal Budget; and such service has the incidental value of helping to direct idle resources into useful work. When the economy is suffering from excessive overall strain or classical inflationary pressures, it is likewise a distortion of the true purposes of Federal Budget outlays to cut them back in order to relieve the excessive pressures. For to do this assumes falsely that the first things to be slashed, when we have to do less of something, are the great priorities which Federal outlays do or should serve.

THE TRUE PURPOSE OF FEDERAL TAXATION

The task of taking care of excessive or deficient economic activity should be impressed upon the tax or revenue side of the Federal Budget and not upon the outlay side. This includes tax increases to restrain classic inflation when the economy is really under excessive pressures, and tax cuts to enlarge the stimulative effect of the Federal Budget when there is excessive economic slack. Taxation, unlike public outlays, has no national purpose per se. Variations in tax rates to

stimulate or retard the economy can be directed toward variations in those expendable or postponable goods and services which the economy and the nation needs less than it needs the priority goods and services represented by the outlays side of the Federal Budget.

The prevalent idea that spending policy and tax policy can be used interchangeably, according to the relative political ease of following one course or another, has been the most salient single error in national economic policies, at least since 1964 and increasingly in later years.

A MODEL FEDERAL BUDGET, TOWARD FULL AND BALANCED RESOURCE USE BY THE END OF 1980

Guided by the above principles, and by the objective of reaching reasonably full employment and production by the end of calendar 1980, I have constructed what I call a model Federal Budget on the outlay side. This is not an intimation of what Federal outlays would be when the Hawkins-Humphrey proposal is enacted into law; that measure does no more than mandate a more orderly and planned procedure for the determination of the total size and composition of Federal outlays, from year to year, by the President and the Congress. Nonetheless, I believe that it will prove helpful to the Joint Economic Committee, to the Budget Office and Committees, and to the Congress at large for me to set forth frankly and fully the model Federal Budget which I have been developing for many years, and have now brought up to date.

My model Federal Budget, measured in fiscal 1977 dollars, calls for total Federal outlays in fiscal 1977 of 432.2 billion dollars, or 38 billion higher than the President's initial proposal for that fiscal year. It is interesting to note that these figures are not too far, looking at the total size of the Budget, from the recent action of the majority of the Joint Economic Committee, proposing fiscal 1977 outlays from 24 to 28 billion dollars higher than the President's proposal. In addition, my model Federal Budget allocates the total Federal outlays among the various components of the Federal Budget, based in the main upon intensive studies which I have made for many years with regard to most of the components covered. For calendar 1980, my model Federal Budget sets forth total Federal outlays of $505.3 billion, or about 111 billion above the President's original budget for fiscal 1977. These total outlays are also allocated among the various components of the Federal Budget.

In the case of national defense and international, I do not pretend to this degree of competency. I project these particular outlays on a moderately increasing basis, not to indicate the necessity for such trends, but only to demonstrate that we can meet our domestic priority needs well without slashes in defense outlays. Any idea to the contrary is, in my view, a dangerous approach to the determination of national security outlavs, and profoundly unsound on economic grounds in the determination of domestic priority outlays in the Federal Budget.10

10 See Chart 9.

This model Federal Budget, designed as I have said to serve properly the great priorities which Federal outlays must help to support, and designed also to be compatible with a viable overall economic model for reaching reasonably full resource use by the end of calendar 1980, is predicated upon the maintenance of Federally-imposed tax rates at where they are now in general, without intending to imply that improvements in the tax structure would not be desirable on both economic and social grounds.

It is probable that an actual Federal Budget, designed to help achieve the end of calendar 1980 objectives of the Humphrey-Hawkins proposal, would involve increases in Federal outlays considerably less than those in my model Federal Budget, which involves an unusually advanced concept of the speed at which the most urgent priority needs should be serviced.

THE COSTS OF A FULL EMPLOYMENT AND BALANCED GROWTH BUDGET

In considering the policies and programs, including those in the Federal Budget, needed to reach reasonably full resource use by the end of calendar 1980, the question has arisen as to whether the costs, and especially the Federal Budget costs, involved in reaching this 1980 objective, would be excessive or even prohibitive. I have therefore made a thorough analysis of this issue, based upon my own projections for GNP and for the Federal Budget. Again I stress that these projections are not intended to delineate actual Budget or other decisions under the Employment and Balanced Growth Act of 1976; these will depend upon the evolving decisions of the President and the Congress. My analysis, however, should provide useful perspective in the formulation of Congressional decisions about the Federal Budget, with or without the enactment of that measure.

The first step in my exercise, in this connection, is to estimate the difference in GNP between a performance designed to achieve a reasonably full economy by the end of calendar 1980, and the GNP performance which I estimate would result from a normal projection of current policies and programs. I have already described the conservative and reasonable nature of these two projections. The two projections result in a GNP difference of 897 billion fiscal 1977 dollars during the four calendar years 1977-1980 inclusive. This difference is not the same as the 1.1 trillion dollars difference which I projected earlier in this discussion, because that earlier projection started with calendar year 1976 instead of calendar year 1977, used calendar 1975 dollars instead of fiscal 1977 dollars, and was designed to reach the full employment goal at the end of calendar 1978 instead of at the end of calendar 1980. The 897 billion dollar difference, which I have just discussed, is designated by me as the incremental GNP benefit which would result from policies and programs designed to reach reasonably full resource use by the end of calendar 1980.

As the next step in the same exercise, I use my model Federal Budget and compare it with the outlays which would result from a normal extrapolation of the President's fiscal 1977 budget, projected to grow in real terms at the rate of 4.3 percent per year, this being the actual annual average real growth rate during the fiscal years 1974-1977. My

model projects the real average annual growth rate in Federal Budget outlays at 5.53 percent, or much lower than the projected needed real growth rate in GNP. These two projections result in a difference in Federal Budget outlays of 172.1 billion fiscal 1977 dollars in the aggregate for the four fiscal years 1977-1980, or an average difference of about 43 billion a year. I designate this as the incremental increases in the Federal Budget needed to help reach the full employment and GNP goals for the end of calendar 1980, and adequately to help serve these great priority needs which depend upon help from Federal outlays.

The central significance of this exercise is the demonstration that the incremental benefits in GNP would be more than five times the incremental Federal Budget outlays needed to help in attaining the incremental GNP benefits. I submit that this is the proper way to "cost-out" a Federal Budget, and that the prevalent policy of ignoring this method is no way to judge or shape a Federal Budget."1

I hasten to add that the incremental Federal Budget outlays which I have depicted reflect all that I think should be done on priority grounds. But they are probably far higher than those which would result under the Full Employment and Balanced Growth Act of 1976, even assuming that the Act in operation will result in adequate Federal Budget outlays to meet the targeted production and employment objectives for the end of calendar 1980.

Even more important, my estimate of Federal Budget outlays have not allowed adequately for the savings which would result from a full employment and balanced growth program. Although I have tried to factor in the reduced costs arising directly from lowered unemployment benefits and welfare costs, I have not been able to quantify the huge savings resulting from reduction of crime and other social aberrations, in consequence of full job opportunity. I am not able to factor in the dollar amounts representing the reduction in Federal Budget interest costs, in consequence of essential changes in the prevalent monetary policy. And above all, I have not been able to factor in the Federal savings which would result from the reductions of duplicating, conflicting, nonproductive, and downright erroneous Federal programs. All of these savings, and others, would result from the improved planning and other genuine economy provisions of the Hawkins-Humphrey proposal.

HOW TO BALANCE THE FEDERAL BUDGET, AND THEN CREATE A SURPLUS

The question naturally arises as to what effect the pursuit of a Federal Budget policy consistent with a full employment and balanced growth policy would have upon the condition of the Federal Budget itself. There is now prevalent recognition that the huge and growing Federal deficits have resulted, not from excessive Federal outlays nor from deficient rates of Federal taxation, but rather because the blood of adequate Federal revenues cannot be squeezed from the turnip of a repressed economy. During the calendar years 1947-1953, I estimate that the economy was operating very close to full resource use, or

11 See Chart 10.

even under a very slight general strain. Meanwhile, during the fiscal years 1948-1954, there was an annual average surplus of 1.3 billion 1975 dollars in the Federal Budget. Thereafter, as the GNP "gap" grew, so did the deficit in the Federal Budget. During the calendar years 1971-1975, there was an average annual GNP "gap" which I estimate at 326.3 billion 1975 dollars (projections from 1946; see earlier discussion of what these long-term exercises mean). And during the fiscal years 1972-1976, there was an average annual deficit of 32.1 billion 1975 dollars in the Federal Budget.12

Next, I trace the actual magnitudes of Federal Budget expenditures and receipts during the fiscal years 1971-1977, a period averaging an abysmal low real economic growth rate and intolerably high levels of unused resources. During these fiscal years, the average annual deficit in the Federal Budget was 32.4 billion, rising to a now-estimated 76 billion in fiscal 1976. The Administration now estimates a 43 billion dollar deficit in fiscal 1977, but the weight of objective authority is that it is more likely to be close to 60 billion. In contrast, I project Federal Budget expenditures and receipts consonant with my model Federal Budget in an adequately growing economy. The result is an average annual Federal deficit, during the fiscal years 1977-1980, of 10.5 billion dollars, or less than one-third the average during the fiscal years 1971-1977. The result is also a balanced budget circa fiscal 1979, and a surplus rising to an estimated 13.9 billion by calendar 1980.18

TRENDS IN FEDERAL BUDGET OUTLAYS, AND IN THE NATIONAL DEBT, NOT "ALARMING"

In view of all the alarms about the growth in the Federal Budget, and in the national debt in consequence of mounting Federal deficits, it is most important to note the following facts: While Federal outlays on a per capita basis have grown greatly over the years, in response to the real needs of a growing economy and an advancing GNP, these outlays as a percentage of GNP have remained remarkably constant since 1954.14

Federal Budget outlays were 43.9 percent of GNP in fiscal 1945, in consequence of World War II. They were only 21.2 percent in 1953. The ratio was below 21 percent in every year save one from 1955 through 1974. They then rose to 23.5 percent in fiscal 1976, in consequence of a very poor economic performance during the immediately preceding years. The officially estimated ratio is 21.5 percent for fiscal 1977. Under my projections for appropriate growth in GNP and in the Federal budget, the ratio would drop year by year to an estimated 20.8 percent in fiscal 1980.

The ratio of the gross Federal public debt to GNP was 110.0 percent in fiscal 1945. It was reduced to 61.9 percent in 1953, and 47.6 percent in 1960. The ratio moved generally downward to 25.5 percent in fiscal 1974, and then rose to 30.4 percent in fiscal 1976, and is now officially

12 See Chart 11. Chart 12 gives an even more poignant demonstration of the intimate relationship between the condition of the national economy and the condition of the Federal Budget. Chart 12 also demonstrates that a healthy economy results in unusual price stability. while a sick economy results in unusual price inflation.

13 See Chart 13.

14 See Chart 14.

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