Of course if you issue bonds, you are in effect creating a new pool of currency from which this kind of activity can be financed. There may be some way of relating these projects to the budgets of States and subdivisions which will not have the effect which the bonding system would, of creating a new bulge on the economy, but it would occur to me that you are going to get the Keynesian effect with considerable dividends if we are not very careful.

Now you take this area again, as one example. We are at the point where not only are we saving the money by not building the advanced waste treatment system for the capital of the United States, but we are approaching the point where you are going to have to stop issuing building permits. Now that will have a very deflating effect. That will accomplish a great deal in the way of sort of collapsing the economy in this area.

Once that happens, you are going to have some problems in pumping it up again. I know this is what you have aimed to do over your entire career in government, which is to work so gradually that you don't have a sudden flat tire on your hands, but this is the kind of area where it seems to me gradualism is very, very necessary.

I would appreciate your thinking a little bit about this urgent area because it is my observation, and if the Senator from Hawaii has any comment on it, it is my observation that we are not going to have this particularly urgent needed public facility under the budget as it is presently outlined. I just don't see how it could happen.

REDUCTION OR TERMINATION OF ACCOMPLISHED PROGRAMS

Moving from that, I am interested in the rationale for either the elimination or reduction of certain programs on the ground that they have succeeded. They are a sufficient success that they no longer have to be the stepchildren of Government and that they are ready to go out to adoptive parents in either the private sector or among State and local governments.

Could you tell the committee on what basis this question of effectiveness was determined? When was a program judged so effective that it could be spun off?

Secretary SHULTZ. I think a pretty good example is the program to stimulate the building of hospitals, the Hill-Burton program. There are others here who know this program better than I. The purpose of the program was to develop an adequate number of hospital beds to take care of the patients that we have and that we prospectively will have. As a result of that program, among other things, there has been a tremendous amount of hospital construction.

Now we have reached the point where I believe something on the order of 25 percent of the bids are empty. So, the program has succeeded. If you say the goal of the program was to have enough beds so that the people who needed them could have one, that does not mean that in every area of the country we have precisely that situation, but just taking it by and large that seems to be the case. That being so, then it would seem as though we should stop doing that-not because it has not been successful, but because it has. It has achieved the purpose for which it was set up. Let us now devote our resources to something else.

COMMUNITY MENTAL HEALTH CENTERS

Senator MATHIAS. I think that is one kind of objective test. What about the more subjective questions, for instance, the community mental health centers where we are still on a sort of frontier? I am not sure we even know what the national needs are in this area, let alone whether or not we have enough.

Secretary SHULTZ. I will ask Mr. O'Neill to comment on that, because he is familiar with that program and I am not.

Mr. O'NEILL. Senator, we believe that we have in fact demonstrated that the community mental health center modality of providing mental health care is a more effective way of providing that care than in large State institutions.

Senator MATHIAS. Where you had inmates, bed patients and what-not?

Mr. O'NEILL. Exactly. What we have said in the 1974 budget is this: That the Federal Government has made initial staffing commitments to, as I recall, about 400 community mental health centers around the country. When the program started, it started with a demonstration program. We think those centers have demonstrated the effects we discussed. What we propose is the appropriation of all of the budget authority needed to meet the Federal commitment to existing centers.

Over the next 8 years, as provided for in the authorizing legislation, the Federal Government can then pay off its commitment to the mental health centers.

Chairman MCCLELLAN. I am sorry, it is a rollcall vote and we have 15 minutes now. We will have to run over there. We will have to suspend until we vote and come back.

[Whereupon, a recess was taken.]

FISCAL OUTLOOK FOR STATE AND LOCAL GOVERNMENTS

Chairman MCCLELLAN. Senator Mathias has arrived. You were not quite through, were you, Senator?

Senator MATHIAS. Not quite. I have just one or two more.
Chairman MCCLELLAN. Keep the interrogation together.

While I have the attention of everyone, the Secretary has a rather important engagement for 4:30, so let us undertake to accommodate him by getting through by that time. Mr. Ash can remain, as I understand it, and we can further interrogate him.

I will give every one an opportunity to ask the Secretary such. questions as they may wish. All right, proceed, Senator Mathias. Senator MATHIAS. Thank you, Mr. Chairman.

When we were called to the floor to a vote, we were discussing those programs which had graduated from the stewardship of the Federal Government. I want to say that I am not opposed to this philosophy in any sense. In fact, I applaud the concept that we are making some attempt to evaluate the effectiveness of the program. There is a great deal more to government than simply determining in a given Government office nobody is stealing and they are not goldbricking and they are not clock watching.

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The really relevant question is are they doing a job which is of importance to the American people? So, I don't want to be thought to be questioning the usefulness of this kind of study, but I do wonder where the local communities, particularly in the short haul, are going to be able to pick up the cost of these programs that are judged to be so effective that they ought to be put out on their own.

Has some estimate been made of the ability of local government to pick up this load and what will be the economic result of that?

Secretary SHULTZ. In terms of the community mental health program you were asking about, the answer is that these particular programs are proposed to be funded for an 8-year period so that local governments don't have to pick up that commitment. At the same time, I think the whole spirit of revenue sharing is that communities should be thinking about their own priorities as they see them and using resources that are at their disposal to meet those needs.

And I think it is true that the fiscal situation of States and localities now is much better than it was, say, 3 or 4 years ago. So they are better able to handle these problems.

Senator MATHIAS. I agree with you that is one of the hopeful outlooks. The National League of Cities and the U.S. Conference of Mayors have both stated that things are looking up, but in the October survey of current business published by the Department of Commerce there is some caveat to that. One of them is "It should be recognized even though the aggregate budget is improved, that many individual States and localities continue to face severe fiscal problems," and, secondly, that state that "Although the fiscal outlook for State and local governments is brightening, there are reasons to believe the extremely large surpluses for the long run suggested by recent studies may not be realized." I would just inject a note of caution in that.

ESTIMATED REVENUES

One final question, Mr. Chairman, and that is on the question of revenue estimates. I do not want this to sound like a "have you stopped beating your wife" question, but I am wondering whether you would characterize your revenue estimate as conservative or prudent or liberal?

Secretary SHULTZ. They are not necessarily right, but they are our best estimates.

Senator MATHIAS. Let me say the basis for this is that I understand, for instance, in the current year that some other responsible fiscal agencies of Government are a little more optimistic than you are about current revenues for this fiscal year. I am wondering if that same kind of dichotomy exists with respect to the projections for the next year.

Secretary SHULTZ. We have tried to put forward our best estimate based on the GNP projections that are shown in the budget document. The actual GNP may turn out to be different from what has been projected. That will change the revenue estimates. The composition of it can be different. If corporate profits are larger, that tends to generate more revenues because of the tax rate on them.

So there is plenty of room for error here. My own observation is that people tend to underestimate what is going to happen when things are moving up and they overestimate when things are moving down. In other words, they have a hard time capturing the trend.

We have tried to be conscious of that. At the same time, I don't think that alters the feeling about spending, because we feel that the discipline ought to be the full employment concept.

Senator MATHIAS. You have been under some close questioning for example, on where projects which are not budgeted might be funded. It seems to me we are dealing with a subject here which, as you suggest, is only accurate within the range of projections and nobody hows exactly how accurate they are. But I would infer, from what you are saying, that except for a margin of error for this kind of projection that you are probably laening to the conservative side on your revenue estimates.

Secretary SHULTZ. That would be my personal guess, but I have no basis for believing anything other than what is here. It has been done in the most professional way we can think of.

Senator MATHIAS. I am not questioning that at all. These things as you suggest, always in the event turn out to lean one way or the other. I was trying to get some sense of the probable positions we were in.

Thank you very much, Mr. Secretary, Mr. Ash, Mr. Chairman.

CONGRESSIONAL AUTHORITY TO ESTABLISH AN OUTLAY CEILING
Chairman MCCLELLAN. Senator Chiles.

Senator CHILES. Mr. Secretary, I appreciate very much your patience. This has been a long day. We appreciate your testimony We talk about the figure of the $250 billion for the spending ceiling for 1973 and $268.6 billion for 1974. We talked about Congress feeling in regard to the spending ceiling. The area that I wanted to try to get clear is that these figures, as I understand it, are made up of the estimates that the administration has taken into account of the theory of the full employment budget plus what the anticipated revenues will be and what spending programs, established spending programs would be that would meet the priorities of a national commitment as I understand it.

These are the administration's figures; are they not?
Secretary SHULTZ. Yes, sir.

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Senator CHILES. Then do you recognize that Congress has province, even if they are going to effect a budget ceiling or spending ceiling. Do you think Congress has a right to look at these figures and make their decision as to what they think the ceiling should be, higher or lower, than these particular figures?

Secretary SHULTZ. Absolutely. In fact, the Congress approved of the $250 billion figure last year, because it was voted as the appropriate number by both houses. That is what finally passed. Congress did participate in that number. We have asked that Congress examine thi question of a ceiling and set one. So we are very much in accord with the chairman's suggestion here.

Senator CHILES. Of course it appears that the administration takes great confidence in the fact that both Houses voted the $250 billion ceiling. Of course, at the time the Senate did that, it had provisions o how any cuts would be made. That appeared to be very important to the Senate. It was not very important to the executive branch as to how those cuts should be made. Then it is your feeling that in 1974 that the Congress can speak to what the ceiling should be and can have its figure as to what any ceiling would be in that year.

Secretary SHULTZ. Let me remind you, Senator, that after World War II, quite a job was done under the leadership, if you want to put it that way, of Secretary Johnson of ripping down the Defense Establishment, and what did we get for that? Well, I think to a certain extent one can make a case we invited the Korean war by stripping ourselves too far. Let us not make that mistake again. Let us reduce further through the process of negotiation—not just unilaterally.

Senator SCHWEIKER. A 10 percent cut in manpower is not any ripping down of military strength. Our strength depends on bombs, missiles, nuclear subs. Whether we have 2 million men or 1 million men will not make us safer. We could build up the National Guard and Reserves and do it cheaper than we have today.

We have asked business, agriculture, everybody else, to prune, to cut down their expenses.

Here we have increased the pay of the military, which I am for, but when we do it, we should put military on notice and say, "You can't waste the manpower as you have done in the past."

You have to apply the same standard to military manpower as to the rest of the budget.

Secretary SHULTZ. We have reduced military manpower by 40 percent since the Nixon administration took office; that is a lot. You can't keep knocking it off and expect to maintain a reasonably strong structure to maintain the peace. That is the trouble.

Senator SCHWEIKER. But we have a new policy now, a Nixon policy, of not using our forces to fight foreign wars.

Secretary SHULTZ. We are under no illusion that we can strip ourselves of our strength and expect to see peace maintained in the world. Don't operate under that illusion for a moment.

Senator SCHWEIKER. There is not a military base in this country or abroad that could not be cut 10 percent without one change in the status of our security.

Secretary SHULTZ. I am sure that there are some military bases that could be closed without disrupting our military security.

INCREASES IN FOREIGN AID

Senator SCHWEIKER. The other point of the budget that you fellows are upping is foreign aid. You are going up a half billion dollars in foreign aid.

Does that include plans for Vietnam rehabilitation?

Secretary SHULTZ. No.

Senator SCHWEIKER. Or are we going to be confronted with another add-on in foreign aid later in the year on Vietnam rehabilitation?

Secretary SHULTZ. As we discussed at length this morning, the budget does not contain any Southeast Asia reconstruction funds. We don't know what will emerge from the discussions, so we have no quantitative and precise information to give you on that subject.

Senator SCHWEIKER. I think it is very critical because again the press has blown this battle up as a battle between spenders and savers. think it is clearly a battle over priorities.

COOPERATION IN CONTROLLING OUTLAYS

Secretary SHULTZ. I am delighted. Let us agree that we are all savers and we all want to operate within the $250 billion and the