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Roberto J. Morgado, New York State's Director of Operations, said that “we believe that we stand to lose millions in Federal funds under the proposed formula."

“We would lose a significant amount of our Federal assistance," he added. "A tradeoff of more flexibility at the cost of dollars is not necessarily a fair trade."

Officials in New York City and the three states predicted that President Ford's proposal to replace 59 grant programs in health education and social services with block grants would mean the elimination and curtailment of many federally funded programs that had been retained because they had been heavily supported by Federal funds. Thus, despite worsening fiscal crises, the elimination of those programs would not save localities much money, since the Federal Government paid 50 to 80 percent and sometimes 100 percent of the costs.

Under the President's proposal, the state would get Federal funds to use as they saw fit.

"A lot of times you could justify not cutting back a program because you would lose Federal funds," said Paul Gibson, New York City Deputy Mayor for Planning. "This would no longer be the case."

Kenneth Axelson, New York City Deputy Mayor for Finances, said that "if we were given greater freedom in the use of our funds, our system of priorities would have a greater impact on our dcisions."

LAYOFFS A PROBLEM Jay Tipper, Connecticut Commissioner of Finance and Control, said that "if layoffs were going to occur, we were not going to lay off people funded 90 percent by the Federal Government; we would not go after those with high reimbursement levels, because you'd have to lay off so many more people to have a substantial saving of state tax dollars."

A New York State official, who declined to be named, said that "basically, the consolidation is going to be very detrimental.

“New York gives conscientiously to health manpower, medical schools, venereal disease programs, a wide range of health programs," the officials said. "Other states do not and let New York take care of their health problems."

Marilyn Berry, director of New Jersey's office in Washington, who is one of the Governor's leading advisors on Federal programs, said that President Ford's proposed consolidation of health, education and social service programs would be "a fiscal disaster" for her state.

Miss Berry noted that Medicaid costs had risen 22 percent a year, and that the state had already eliminated all optional medical services, leading to a lawsuit against the state by the New Jersey Hospital Association.

"From here on out, we will be forced to incur the increased costs in our Medicaid program," Miss Berry said. “We just don't have the resources to do that."

Miss Berry noted that the Federal Government provided 70 percent of New Jersey's health budget and 50 percent of the funds for the venereal disease program.

"The VD program is strong in New Jersey,” she said, “but as the pressures grow, I don't know what we're going to do."

Similarly, programs for maternal and child health, immunization and comprehensive health planning will be jeopardized, she said.

The President's mass transit proposal would limit to 50 percent the amount of special grant funds that could be used for operating subsidies. There is no limit now, and all of the $71 million goes for operating subsidies. The proposal would remove $35 million.

“That's going to be fought,” Mrs. Abzug said. "He's not going to succeed."

Representative Edward J. Koch, Manhattan Democrat, who is an author of the present legislation, said that “I wish that the Transportation Secretary used the mass transit facilities, or better still that all had Government-financed limousines

President Ford's proposed budget gives New York, New Jersey and Connecti. cut a total of $52.6 million in harbor and reclamation projects under President Ford's proposed budget.

New York State would receive $25.8 million, including $2.3 million to build anchorages in New York Harbor. In addition, $790,000 is earmarked for the collection and removal of harbor drift.

The new budget would appropriate $1.8 million to build a Fire Island inlet, and $1.2 million for an East Rockaway inlet to Rockaway Inlet and Jamaica Bay.

The budget also allots $530,000 to demolish the Federal Pavilion in Flushing Meadow, where it was built in 1964 for the New York World's Fair.

New Jersey would receive $13.9 million under the proposed budget. This would include $1.78 million to build a flood-control project in Elizabeth, $7 million to operate and maintain Delaware River navigation facilities and $1.1 million to operate and mantain of Newark Bay.

Connecticut would receive $12.9 million. This would include $1.6 million for flood control in Danbury, $9 million for control of the Park River and $100,000 for a hurrican barrier in Stamford. Comparative figures for previous years were not available. Mr. O'NEILL. Senator, the news story is just incorrect.

Senator Javits. Fine, well you put the facts in the record. I will ask unanimous consent that they be included.

Chairman HUMPHREY. Certainly.
Mr. O'NEILL. We will supply the facts, Senator Javits.
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Chairman HUMPHREY, Congressman Reuss.

Representative Reuss. Thank you, Mr. Chairman. I'm not going to concern myself, Mr. Lynn, with public versus private. I just want to focus on the following issue. Your upcoming budget projects an unemployment level at 4 percent in 1977 and a surplus of $3 billion as opposed to a projected full-employment deficit in the current 1976 fiscal year of $16 billion. That is a $19 billion switch. This is at a time when, according to the Federal Reserve Index, 30 percent of this country's industrial capacity is not being used; a time unemployment, as Mr. Greenspan admitted yesterday, is continuing to be "distressingly high."

So, the President's program, irrespective of whether it is governmental or private, therefore continues to waste 30 percent of our industrial capacity and continues to have a “distressingly high" percentage of our population unemployed. By what screwy reasoning do you continue to repress the economy?

Mr. LYNN. We are not-
Representative Reuss. What is your motivation?
Mr. LYNN. We are not doing any screwy reasoning, Mr. Reuss.

Representative REUSS. What is on your mind? Where are the bottlenecks that you see? Can you name them? Are they steel? Are they aluminum? Are they widgets? I don't know. You tell us, because we would like to get the work and do something quickly about those bottlenecks.

Mr. Lynn. If we want to talk about screwy reasoning, a screwy reasoning is the reasoning that says

Representative Reuss. No, I want to talk about your screwy reasoning.

Mr. Lynn. Okay. I don't have any I will say I am a little bit baffled by reasoning that says we could increase receipts by x amount of money if we

Representative Reuss. Just answer the question and don't take up my time. Just get on with the answer.

Mr. Lynn. Okay. My answer to this. Implicit in your question is a theory that unless the Federal Government continues to grow and in fact and even to grow faster

Representative Reuss. No, it isn't implicit. I want you to tell me where are the bottlenecks in the economy which you see exploding if public activities get bigger? Why are you repressing private activity? I mean I will go along with you Why do you insist on unemployment that, by your own admission, will continue to be “distressingly high” next year? Tell me is it steel? Is it aluminum? Is it cement? Where are the bottlenecks? Why are you repressing things?

Mr. Lynn. I don't believe we are repressing things and I don't think we are insisting on high unemployment. In fact what we want to do is get unemployment down as quickly as we can. But we don't want to fool the American people by some quick fixes that result in this country going back up to double-digit in either 1977 or 1978 and then having an even bigger recession.

Representative Reuss. Now how do you get all of this resurgence of inflation in an economy where only 70 percent of the industrial capacity is being used and where unemployment of over 8 million

mer confidenepacity will be capacity to be

is distressingly high? Maybe you are right, but we would like to know about it so we can take some corrective action. Where are the bottlenecks?

Mr. Lynx. First of all, you are right. You are right on our capacity. Our capacity overall is measured two or three different ways, there are different ways of doing it, but by any measure we have unutilized capacity. And we want to get that capacity to be used more We do believe that that capacity will be used more if there is continued consumer confidence. And we have seen a resurgence of consumer confidence in the last months. We do believe that confidence will also return if the private sector thinks we are for real in getting the Federal Government out of markets over a period of time, and if we are for real in trying to get a handle on inflation, and if we are for real in tax reductions. If they think we are for real, they will go out and make the investments that produce construction jobs and this results to some extent from the program that the President has proposed—and these things will result in that capacity being utilized.

Now, let me say what we are afraid of. If we add to the deficits and keep adding to these deficits, the private sector and the public at large are going to do just the opposite, as they have done for the last year and a half. When inflation started increasing, people didn't go out and hoard goods, they saved money. When they saved it and didn't spend it, that hurt the economy. So the bigger the deficits have gotten, the more people save their money; and the higher the rate of inflation was, the more they saved. Just look at housing. I have lived with that problem and you certainly have too, Congressman, for a fair period of time. The best thing you could do for housing in my judgment, and the most important thing you could do for housing, is to get the deficit down. If you got the deficit down, and also gave that extra $227 a year in tax breaks to the American people less the social security offset that we talked about, what will happen is interest rates will come down. After all, we talked about current interest rates having come down. There we were talking about shortterm rates. The long-term rates are still up around 9 percent. That is a heck of a lot of money to put in a monthly payment on a house. If you are a banker, are you going to lend money at 4 percent or 6 or 7 percent if the dollars you get back 15 or 20 years from now aren't worth anything?

Chairman HUMPHREY. Congressman Brown of Michigan.

Representative Brown of Michigan. On the job figures, Mr. Lynn, I don't believe I heard the figure that you think that will be produced by this budget in fiscal 1977 in theprivate sector. I have heard the figure of 312 million jobs. A good portion of those would accommodate, in effect, the new people coming into the work force, an additional amount would accommodate the unemployed. That is how you come up with your unemployment figures; is that right?

Mr. Lynx. Yes.

Representative Brown of Michigan. What areas do you feel will cause this phenomena to occur? What factors in the budget?

Mr. Lynx. The factors are the fiscal policy reflected by the budget as an element of overall economic policy. And the economic policy that we think will cause it is trying to get a handle on inflation, and

e talkeaks to the deficit down for

the buis providing the developmichigan.

hat bassentative job detimulus in follow. 7

the business confidence that will follow. The other facet that will do it is providing the stimulus in a way we think will concentrate on private sector job development.

Representative BROWN of Michigan. Is it not correct then to say that basically you are trying, in effect, to reverse the trends that caused the present problem?

Mr. Lynn. That is right.

Representative BROWN of Michigan. And that is that unemployment has been caused by a recession and that recession was caused by inflation. And I had to remind the people here yesterday that inflation had its base back in the 1960's when there was neither a Republican Congress nor a Republican administration. So what you are saying is if we can reduce inflation, we will not have recession; we will have a recovery, and we will not have the unemployment? The important thing is to make sure that we add as much stimulus as possible to the economy that it can accommodate without more inflation, so that we have no recession and we have greater employment? Mr. LYNN. Exactly.

Representative BROWN of Michigan. Right. The Congressional Budget Office apparently came out with an estimate that the proposed tax increase, outlined in the budget. If it were deducted from the proposed tax cuts, that the net reduction in taxes contemplated would be only $1.7 billion. How would you respond to that?

Mr. Lynn. I don't have the details in front of me. But I can say this. A number of these calculations that I have seen take into account, as tax increases, increases that would occur anyway quite apart from the President's proposal. By that I mean for instance, that the base goes up under social security twice, on January 1, 1976, and on January 1, 1977. To tie that into the President's proposal I think is totally unfair because whether you accept his proposal or not, that is going to happen. Therefore, what the President is saying is let's at least offset these increases by reductions in the income tax. Let's make them permanent, and make them larger then what would happen with a simple extension of the law that was passed in the dying days of the last session.

Representative Brown of Michigan. There is one thing in the budget

Mr. Lynx. The tax increases attributable to the President's proposals were, if I recall correctly, $3.3 billion under social security and $2.1 billion on the unemployment insurance in fiscal year 1977. But again on the unemployment insurance, what choice is there in that regard? What would happen if you make those hard choices on unemployment insurance and social security and do nothing to reduce the income taxes? The reduction at least offsets something that has to be done. Whether the exact time, Mr. Chairman, is this month, next month, a year from now; the President chooses January 1 of 1977.

Chairman HUMPHREY. After the election. Mr. Lynn. First of all, it is a very convenient date with respect to a start-up date.

Chairman HUMPHREY. July is convenient, too.

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