(The Bureau of the Budget's reply follows:)

EXECUTIVE OFFICE OF THE PRESIDENT,

BUREAU OF THE BUDGET, Washington, D.C., August 14, 1969.

HON. WILLIAM PROXMIRE,
U.S. Senate,

Washington, D.C.

DEAR SENATOR PROXMIRE: Your letter of July 25 requested further responses to your earlier questions pertinent to the June 12 hearings of the Subcommittee on Economy in Government. Our responses are enclosed.

Sincerely,

PHILLIP S. HUGHES, Acting Director.

(Bureau of the Budget additional replies follow :)

1. (Question 1) As our July 19 reply stated, the major policy issues mentioned by Assistant Director Carlson do not include all the issues submitted to any agency. The Bureau has communicated many other important issues to agencies. Major issues have also been developed by other agencies in the Executive Office of the President and by White House staff. Moreover, we expect many additional policy issues to be raised and considered as the fiscal year 1971 budget is being developed between now and January 1970, and as we look forward to the fiscal year 1972 budget.

The major policy issues mentioned by Assistant Director Carlson in his earlier testimony before the Joint Economic Committee include:

1. Commodity program decisions on price supports and acreage diversion. 2. Alternative Federal policies and programs designed to stabilize timber prices.

3. Evaluation of the status of current Federal direct loans to the rural electric and telephone programs.

4. Study of procedures to remove interest rate ceiling in Farmers Home Administration loan programs.

5. Improvement of the U.S. trade surplus.

6. Area and regional economic development program rationalization.

7. Construction of merchant ships abroad.

8. Federal food assistance programs.

9. Increasing the supply of physicians.

10. Health services research and development in the Department of Health, Education, and Welfare.

11. Community mental health services.

12. Health insurance and reforms in Medicaid.

13. Plan for experimental education programs.

14. Analysis of higher education student aid proposals.

15. Evaluation plan for education programs.

16. Extent and nature of financial crisis in institutions of higher education. 17. Impact analysis and improved data system for elementary and secondary education.

18. Relationship of Social Security benefit system to current prices and earnings.

19. Effectiveness of the social services provided to public assistance recipients. 20. Utilization of the minimum benefit under Social Security to support income of needy beneficiaries.

21. Short-term assessment and long-term evaluation plan for the WIN program.

22. Impact of new neighborhood development program on urban renewal program and on the budget.

23. Evaluation of water and sewer programs relative to stated or implied objectives.

24. Establishing priorities within and among the Federal agency land acquisition programs financed through the Land and Water Conservation Fund. 25. Analysis of reclamation construction policy.

26. Selection of reclamation new starts.

27. Effects of Federal reclamation fees on private provision of facilities.

28. Alternatives for utilizing Naval Petroleum Reserve No. 4.

29. Review of helium program.

30. Alternatives for more intensive use of plant and other fixed resources within Bureau of Indian Affairs school system.

31. Central Valley program special study.

32. Review of coal demonstration plant program and other research activities. 33. Alternative ways of meeting water demands.

34. Excess lands policy.

35. Impact of budget constraints on water resource project construction costs. 36. Relation of inputs and outputs in Federal crime reduction.

37. Crime statistics and information.

38. Configuration of manpower programs at different levels of economic activity.

39. Transition of youth from institutions to work.

40. Design and strategy for research, evaluation, and data collection for managing manpower programs.

41. Facilities planning and pending construction.

42. Internal management of postal system-potential for decentralization of authority.

43. Restructuring of preferential mail service and smoothing of postal operations workload peaks.

44. Role of postal source data system in fulfilling operational and fiscal management information needs.

45. Federal involvement in airports.

46. Post-interstate highway program.

47. Federal role in urban mass transportation.

48. State and community highway safety grant program priorities.

49. Level of IRS audit coverage.

50. Standards of protection for Presidential candidates.

51. Disposition of uranium enrichment enterprise.

52. Costs and benefits of R&D on liquid metal fast breeder reactor.

53. International cost-sharing in high energy physics.

54. Possible stockpile adjustments.

55. Optimum method of supply (for items in the Federal Supply System). 56. Financing of GSA real property activities.

57. Future requirements of the Advanced Records System.

58. Auto replacement policy.

59. Role, scope, and flexibility of manned lunar exploration.

60. International cost-sharing for space programs.

61. Future level of NSF's direct training programs in the light of the reduced rate of expansion of Federal research.

62. Graduate science development programs under reduced Government support of research.

63. Strategy for NSF's applied research program.

64. Priorities (and international cost-sharing) in astronomy.

65. Plan for organization and operation for OEO research and development effort.

66. English language broadcasting level and costs.

67. Impact of Medicare and Medicaid on medical care programs.

68. Veterans and survivors compensation: alternatives to achieve better goals. 69. Availability of mortgage financing for veterans.

70. Contingency reserves for health insurance.

2. (Question 3) At the present time, most of the Bureau of the Budget's staff who review national security programs are heavily engaged in the Nixon Administration's broad, comprehensive review of alternate defense strategies and the force and budget levels associated therewith.

Each examiner, in his review of the programs for which he has responsibility. makes a thorough analysis of weapons performance and cost, and the comparative effectiveness of existing systems and proposed systems. During this review, the examiner takes into account the degree to which cost increases have been experienced with similar systems. The kind of broad, formal study comparing weapons system performance and profitability, similar to the one completed by Richard A. Stubbing while he was a graduate student at Princeton University. however, is not presently being undertaken by the Bureau of the Budget.

3. (Question 4) There are four parts to this question.

(a) The influence of international commitments on the ability of the Government to cut substantially defense expenditures.

In his prepared testimony and in answer to questions; the Director stated that significantly lower defense costs will be obtained only if we-the Nation-reduce

our international commitments significantly. As was noted in our earlier response, his answers were in response to a suggestion that defense spending could be cut immediately by $10 billion without changing our national commitments. We continue to hold the position that reductions totaling this amount are not possible without changing our commitments.

The Director also stressed that both our international commitments and the budget to support them are proposed by the President and acted upon by the Congress and, therefore, are decided jointly by the Congress and the President. There was no intention in either his testimony or his answers to imply that the Congress' role is a secondary one.

The nature of our present international commitments, the relationship be tween these commitments and the degree of defense readiness that is required to meet them and possible alternate defense forces and budget levels are currently under review by the Administration. The Bureau is intensively involved in these efforts. Proposals resulting from this review will be submitted to the Congress for its consideration.

(b) The examination by the Bureau of the Budget of the need to replace the old bomber defense system, SAGE, with a new system, AWACS.

The Bureau of the Budget and the Department of defense have been examining the Airborne Warning and Control System (AWACS) as an alternative to the ground-based SAGE. In keeping with declining threat projections in recent years, the Bureau has recommended and the Department of Defense has accepted significant reductions in the SAGE system. AWACS, if it is successfully developed, would permit even greater reductions in the SAGE system as well as in total air defense costs.

(c) The reasons why the Navy has 15 attack aircraft carriers.

The size of the Navy's attack carrier force is based primarily upon numerous studies conducted in prior years by earlier administrations. Funds to build this force were appropriated by the Congress specifically for that purpose.

The number of attack carriers which will be required in the future to support our international commitments is one of the defense issues not yet resolved by the Nixon Administration. The earlier studies, which support the logic of satisfying our overall tactical air requirements with a mix of land and sea-based forces, are being reviewed.

(d) The relationship of the Executive and Legislative Branches regarding international commitments.

As you know, the question of national commitments was actively considered by the Senate this session when it adopted Senate Resolution 85 on June 25. The views of this Administration on that subject are expressed in the letter of March 10, 1969, from Assistant Secretary of State William B. Macomber, Jr., to Senator J. W. Fulbright, Chairman of the Committee on Foreign Relations. That letter appears on pages 35-38 of Senate Report No. 91-129 of April 16, 1969, which accompanied S. Res. 85. Among other points, it states:

"We recognize and firmly believe that close cooperation between the executives and legislative branches of Government is essential in the area of the Nation's foreign affairs. It will be the policy of this Administration to act on the basis of this proposition. We intend to engage in frequent and full consultation with the Congress so that the executive and legislative branches can work in harmony in discharging their respective constitutional responsibilities."

4. (Question 5) As described in the Director's testimony, the formal spring preview and budget review sessions are the culmination of a process which involves all of the examining resources of the Bureau for a considerable period of time in the most intensive kind of review of Federal budget programs. The process begins with each examiner becoming familiar with the programs and issues under his review and leads to formal and informal preview and review sessions with the Director.

Attendance at these sessions varies widely, depending upon the degree of general interest in the subject and the sensitivity of the issues. Attendance at sessions dealing with the economic outlook and with basic fiscal policy, for example, are usually attended by persons from all parts of the Bureau. Those dealing with the most sensitive security issues are, on the other hand, restricted to persons with a "need-to-know."

Although attendance varies, a typical defense preview or review session would be attended by the Director, the Deputy Director, the Assistant Directors of the

Bureau, the Director, Deputy Director, and Assistant Directors of the National Security Programs Division, and appropriate defense program examiners.

During the spring preview, the focus is upon major program issues in order to assist the Director in deciding upon a planning guideline or budget target for the defense budget total. During the budget review, attention is focused more intensively upon specific issues and the specific program levels which together make up the budget mark the Director transmits to the agency head.

The typical manner of proceeding in the preview and review sessions is for the Division examiner or Division Assistant Director responsible for a given program to summarize briefly the issues to be considered. The summary usually includes a statement of the current or proposed program level and its implications, as well as a brief discussion of possilbe alternate program levels and their consequences.

This statement of the issues would normally be followed by questions and answers, a discussion of the issues, and a decision by the Director (1) to accept as the preview guideline or budget mark the proposed or an alternative program level, (2) to discuss the issue in greater detail at a subsequent session, or (3) to examine some other approach for later consideration.

Ultimately, as a consequence of these formal sessions and other smaller, follow-up sessions between the Director and the Division Director, and/or their deputies and Assistants, a preview guideline in the spring and a budget mark in the fall will be determined.

A great deal of attention is given to program objectives. While primary emphasis is on current and budget year costs, life cycle costs are discussed in some detail. Examiners are particularly alert to systems whose costs can be expected to build significantly in future years.

The specific kinds of questions that are considered in the preview and the review of individual weapons systems pertain to such subjects as: cost experience, technical development progress, demonstrated effectiveness, risk (the likelihood that proposed performance can be obtained within cost parameters). specific test results, threat changes, duplications, the urgency of the requirement, the degree of concurrency in development and production, the timely availability of sub-systems and matching components, and a host of similar issues.

Question submitted to Hon. Paul McCracken, Chairman, Council of Economic Advisers, for hearing record of June 12, 1969-"Military Budget and National Economic Priorities":

1. It has been argued before this Committee that one of the major fallacies of the new economics is that it fails to distinguish between the relative values and impacts of alternative kinds of public spending, but argues that the size of the Federal budget is what matters in fiscal policy, but that its composition is of minor importance.

Others have argued that the over-concentration of the Council on only issuei of macro-economic or fiscal and monetary import is one of the basic reasons why the level of defense spending has gotten out of control in the last half dozen years.

Would you comment on these assertions, and describe for us how the performance of the Council could lead to more appropriate expenditure policy in the military area?

Answer to Senator Proxmire's question:

You have asked me to comment on assertions about "major fallacies of the new economics" and about "over-concentration of the Council" on certain issues during the past six years. I am not really the best authority on either point. However, without trying to comment on my predecessors I will explain my own views about the substance of the matter.

I do not believe that the composition of the budget is of minor importance. On the contrary, I believe that it is of critical importance. The composition of the budget is one of the main outcomes of a decision about the allocation of the national output in the service of competing objectives. The welfare of the nation depends upon the wisdom of this decision, and the survival of the nation may depend upon it.

The question of the importance of the composition of the budget for economic stabilization must be understood against the background of the great importance of the allocation decision. What counts for policy is not whether the composition of the budget has some effect on economic stability, or even whether it has an

important effect. What counts is whether that effect is so important as to make it a dominant consideration in the decision on budget composition to the subordination of other effects. And in thinking about this we must also ask whether there are other means of achieving stability objectives that would involve less sacrifice of other objectives. When these factors are considered I believe that we have to put manipulation of the composition of the budget pretty far down on the list of useful instruments for economic stabilization.

The question of the analytical significance of the composition of the budget, as distinguished from the policy significance, is another matter. In our own work to understand the past behavior of the economy or forecast the future we distinguish among six kinds of government expenditures-defense purchases, nondefense purchases, grants-in-aid, transfers, loans and interest.

As for the over-concentration of the Council on macro-economic or monetaryfiscal problems, this is a common and understandable misconception. Macro-economic problems led to the creation of the Council, they are in a sense its breadand-butter and no one else in the administration has a similar responsibility for them. But we regard our function to be the provision of economic analysis on any problem likely to require a decision of the President and on which economic analysis can make a significant contribution. In fact, the greatest part of our time is not spent on macro-economic problems.

The main contribution the Council can make to appropriate expenditure policy in the military area is to analyze and present the economic consequences of military expenditure decisions. As I indicated in my statement, the most important of these consequences is the sacrifice of other uses of the nation's resources, not only for Federal government programs but also for State and local services, business investment, housing, and personal consumption. Procedures adopted by this administration provide an unprecedented opportunity for analysis of these consequences to enter into decision-making and we have devoted a great deal of effort since we came here to this work.

Chairman PROXMIRE. Once again I want to thank you very much for an excellent job. You are extraordinarily able men. And we appreciate your appearance very much. And you have helped us a great deal. Mr. MAYO. Thank you.

Mr. MCCRACKEN. Thank you, Mr. Chairman.

Chairman PROXMIRE. Without objection the articles from the New York Times to which Senator Jordan referred will be put in the record right after his question and at the point preceding his question to Mr. Mayo. (See p. 677.)

And the committee stands in recess until tomorrow morning at 10 o'clock and we will hear Mr. Elmer Staats and Mr. A. E. Fitzgerald. (Whereupon, at 12:50 p.m. the subcommittee recessed to reconvene at 10 a.m., Friday, June 13, 1969.)