However, when the increases in social security taxes are considered and when the impact of inflation which drives individuals into higher tax brackets is consideredthese considerations impact the proposed net tax cut so as to provide a net stimulus that seems modest indeed.

ADEQUACY OF TAX CUT

I am not an economic forecaster, but forecasts abound and the particular forecast you select influences your assessment of the adequacy of the tax cut. Administration economists apparently feel this proposed tax cut will provide the shot in the arm that will sustain the present economic recovery and support a real growth rate of close to 5 percent while reducing the rate of unemployment to 6.2 percent by year's end. Projected for 5 years into the future, i.e., to fiscal year 1983, the proposed taxing and spending structure in the fiscal year 1979 budget would produce surpluses for fiscal years 1981, 1982 and 1983. An essential part of the tax cut program is the $6 billion in business tax cuts designed to encourage business investment and capital spending which has been the weak sister of this economic recovery to date. However, the latest Department of Commerce surveys suggest disappointing business investment intentions and should consumer spending falter near midyear then arguments for a larger stimulus should be entertained. Certainly, if Congress imposes higher energy taxes and does not provide a mechanism to return these revenues, then the tax cut should be enlarged to offset this effect.

RELUCTANCE OF BUSINESS INVESTMENT

On the other hand, business reluctance to expand capital spending and the concomitant poor performance of the stock market suggest the lingering concerns and expectations of the business community about inflation. Some businessmen and their associations apparently feel that the $25 billion tax cut would simply refuel the inflationary process. In fact, these expectations of businessmen may have contributed to a much slower response to the expansion in consumer spending than has occurred in previous recoveries. Given business' higher assessment of the risk factor and its inclusion in the rate of return considered in investment decisions, should the rate of interest rise due to an explosion of consumer spending, then spending on capital goods could remain stalled.

VOLUNTARY PROGRAM TO RESTRAIN WAGE-PRICE INCREASE

In fact, the concerns about inflation expressed by business may be heightened by President Carter's announced voluntary anti-inflationary program-a jawboning effort directed toward management and organized labor and designed to restrain the wage-price spiral. Such a program could prove highly ineffectual-particularly as we move into the major labor negotiations in 1979. One analyst called the program an attempt to charm one-half of 1 percent off the rate of inflation. However, businessmen fear that waiting in the wings is a full dress wage and price control program. It is difficult to be highly enthusiastic about the success of a jawboning program but this combined with some form of wage-price guidelines, perhaps utilizing some tax inducements to hold the line, such as those suggested by Mr. Okun, merit further study. If such programs can contain inflation, there are no present physical constraints, i.e., labor force, plant capacity, etc. that should abort the recovery and the stimulus proposed by the President could promote a strong and continued economic expansion.

GROWTH RECESSION

I sympathize, however, with the Budget Committee, with business and with the citizenry who can read in the Wall Street Journal within the span of a couple of days a lead story on the front page suggesting indications that even with the proposed tax cut we may suffer something called a growth recession in late 1978, and an editorial suggesting that inflation fueled by big deficits is the major problem. On balance, I believe the Carter budget seeks to steer a rather safe conservative course with its proposed net tax cut.

TAX REFORMS

Should the tax reforms fail to pass, then the tax cuts proposed in the fiscal year 1979 budget might have to be adjusted downward since these reforms are revenue raising in excess of $9 billion. In line with some of these proposed tax reforms it may be interesting to note that the Budget Reform or Control Act of 1974 specifically enjoins the budget committees to devise methods of coordinating tax expenditures, policies, and programs with direct budget outlays. Tax expenditures are, of course, revenues that the Treasury fails to receive because of special treatment

granted to individual and corporate taxpayers. Specifically, these are tax revenue losses attributable to a special exclusion, exemption or deduction from gross income, or attributable to a special credit, preferential tax rate or deferral of tax liability. A number of the tax reforms proposed in the President's budget would delete some of these tax expenditures. For example, the Carter budget proposes eliminating or phasing out the Domestic International Sales Corporation because its impact upon exports has apparently not justified the deferral of income permitted under this provision. I would recommend the careful scrutiny of all the proposed tax reforms, but beyond concerns with these specific proposals, both those that are classified as tax expenditures items and those that are not, I recommend the study of all tax expenditures and the concept of tax expenditures. Those that are defensible, I would suggest be made into direct subsidies where feasible, so that their continuation be exposed to scrutiny and discussion as are appropriated governmental monies.

INVOLVE PRIVATE SECTOR IN EMPLOYMENT

Briefly, let me speak to concerns about employment and to one new initiative in the President's proposal budget-the $400 million program to involve the private sector in producing jobs and training for young people and minorities. Such proposals recognize that the high rate of unemployment of certain groups in our economy does not respond to the general employment increases generated by economic expansion. Such problems may be better treated with specific microeconomic attention and solutions. Although programs designed to involve the private sector in providing jobs and training for the long-term and hardcore unemployed would be probably impossible in a recession, the present economic recovery may have created a ripe opportunity to encourage more private participation in job training. The present proposal utilizes the CETA network as prime sponsors and provides linkages to private industry through industry councils of private businessmen. Over time the program might not only provide new initiatives by the private sector in hiring those most subject to high rates of unemployment but might favorably impact both the operation of CETA and its perception by the private sector. Certainly, the success of this employment initiative in the fiscal year 1979 budget could signal a productive future relationship between Government and the private sector that would aid in solving many specific and thorny special industry or sector problems.

Senator SASSER. I would like to welcome my colleague, the distinguished Congressman from the Fifth Congressional District, Congressman Clifford Allen.

Congressman, we are delighted to have you here. I know you have a great interest in the budget process, and we look forward to your contributions today.

I think our next witness would be Senator Douglas Henry. Senator Henry is one of my constituents, but I have the pleasure of also being one of his constituents, since I live in his State senatorial district. And, Senator Henry, I believe you serve on the Senate-Senator HENRY. I'm supposed to chair the Senate Finance Committee, Mr. Chairman. Sometimes that's in doubt, but that is my assigned responsibility.

Senator SASSER. We look forward to hearing from you this morning. You may proceed.

Senator HENRY. You are very kind, sir. First, thank you very much for inviting me. With regard to both you and Congressman Allen, I have not undertaken to tell you all how to do your job. I don't undertake to now. But your staff invited me to come and give my observations and that's the reason I'm here.

Senator SASSER. We are delighted to have you here.

STATEMENT OF TENNESSEE STATE SENATOR DOUGLAS HENRY Senator HENRY. I'm not here, Mr. Chairman, as chairman of the Senate Finance Committee. But I did want to come because that committee has focused into it, and of course it all winds up in the chair, the spending pressures which come to the State of Tennessee

from the advocates and proponents of many good causes which can be funded by the public. Many of them should be funded by the public.

I also have undertaken to represent you and a cross section of Tennesseans ranging from very poor to very wealthy, which happens to be the composition of the State senate district I represent, and I wanted to speak in that capacity.

Now, constituent spending pressures are nothing new to you or me or Congressman Allen. We have a senate finance committee composed I would say of the finest, most responsible Members of the Senate. Yet just the other day we were working our way through the appropriation bill and it became apparent that even a committee such as I have described was in danger of beginning to recommend additions to the budget on the State appropriation bill which would run the possibility of exceeding anticipated revenues by an amount in excess of a safe figure. So we hastily quit, and we regrouped. We are going to come back Monday afternoon with figures and try again. So I am not unfamiliar with budgets such as you and Congressman Allen deal with.

INFLATION

Mr. Chairman, the pinch of inflation is most apparent in the seat where I sit. The State's expenses have risen rapidly. The State's dollars which go into our budget (and of course you gentlemen supply, oh, something around 30 to 40 percent in the average year of the State budget), but the State's dollars which we supply buy less and less. The Federal dollars which you gentlemen supply buy less and less. I'm sorry Chairman Bragg is not here this morning, because I think he is the most outstanding fiscal man in the Tennessee State Senate, rather the Tennessee Legislature. I urge you to give most careful consideration to whatever he may recommend to you.

DEPENDENCY ON FEDERAL SUBSIDIES

The State's dependency on Federal subsidies continues to grow. This not only is a burden on you gentlemen, because you have to devote more and more of the money which you raise away from Federal operating expenses to participation in State programs. And that pressure is up from your standpoint. It also has a somewhat distorting effect upon State government, because it tends to tailor State programs into directions which may be good across the country from looking at all 50 States, but which in a particular case may not be the best direction for their program to take.

INCREASING ENERGY COSTS

Now, there are increasing costs to the State, particularly in the field of energy. There are increasing costs particularly to poor people and pensioners in the field of energy. And I get those reflected to me from both State agencies and constituents regularly and steadily.

RISE IN STATE PENSION COSTS

The pension costs of the State of Tennessee have gone up. I recognize, Mr. Chairman, that some of those pension costs simply result sometimes from my lack of backbone. I know we pass unfunded pension bills, but due to the work of Chairman Bragg, about 2 years ago we finally quit doing that and we now don't make any additions to the pension fund except that which is funded on the front end. However, the pension dollars buy less and less and therefore even though we fund them, we find pension costs rising rapidly in the State of Tennessee.

SOCIAL SECURITY

Integrated into our State pension system are social security payments, and, of course, social security dollars buy less and less each year. You gentlemen in Congress recognized that by increasing the benefits from year to year. But we still have always a gap between the pensioners who retired early on low pensions and find themselves caught by inflation so that either you gentlemen by raising social security, or we by raising State contributions, or both, must continue to meet the increased cost of these older pensioners.

Now, I really am sort of at a disadvantage here because I look around this table and see these distinguished economists, and it seems very presumptuous of me to make any observations on the Federal budget, and I don't mean to imply that I have a technical knowledge of economics-when I was at Vanderbilt I think I took one quarter of economics, and all I remember is that once the Kaiser of Germany told the people you can't have both guns and butter, but you can have one or the other, and I think that was about the extent of my education in economics. But at any rate, fools rush in where angels fear to tread, and here I go.

COST PULL-WAGE PUSH

The unions say that inflation results largely from management cost pull, and I think management says inflation results largely from the union wage push. I've heard these things. And others say the OPEC countries are causing inflation by raising the price on us. But I've got here, Mr. Chairman, a table that came out of a polemic sort of book. I distrust polemics of any kind. I didn't want to inflame the committee, so I tore the page out of the book with the table in it. The table shows your Federal budget deficit. Starting in 1940, you only had 1, 2, 3, 4, 5, 6, 7 years since 1940 when you ran a surplus. All the other years you ran a deficit.

According to this table, your debt in 1940 was $50.9 billion. And ending in 1977 it shows your debt at $708 billion.

HOW DO OTHER COUNTRIES SEE US?

I went to China with Chairman Bragg last fall. He kind of advised me to go on a trip over there. I said, well, how do others see us? How do others see our sense of fiscal responsibility in this country? While we were in Tokyo for 3 days the yen appreciated against the dollar from, I think from 250 down to 240, and each one of my breakfasts I paid $6 for breakfast in the hotel there, bacon

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and one scrambled egg. I recall then we went over to mainland China, and over there the government sets the value of the currency by an index composed of composite Western currencies, I believe the dollar; the German mark; both francs, French and Swiss, and the pound. If I remember correctly they put the index out each day and it affects the People's Chinese yuan and that, of course, went against us-against the dollar-while we were in China. Then I left the tour and went to the other China, Nationalist China on Taiwan, where the Taiwan dollar is fixed by the law over there at 38 to 1 U.S. And debate was raging in the assembly over there whether they ought to make that more realistic, make that 40 or something like that. They decided not to because they wanted to keep their economy tied to ours.

I followed the foreign exchange, or I tried to in the papers. The Swiss franc is now somethng better than 50 cents. The German mark is almost up to 50 cents. Even the French franc appreciates against us. The English pound has recovered up from $1.50 something. That seems to show what other people seem to think about the way we're handling our financial business.

Now, Congressman Allen is in very much the same position I am because he represents in the Federal scheme of things-well, he's not the same as a State representative, though he represents a relatively small district where you have tremendous focused pressures for particular expenditures, and I can understand that. But I would argue that, not just you, Mr. Chairman, but the Senate, just generalizing across the United States, the Senate at large, the Senator represents, by and large, a very large constituency and by reason of the political process he is perhaps more insulated from these pressures than those who represent smaller districts.

Mr. Chairman, again without pretending any knowledge of economics at all, I would argue to you that when you have these deficits which say in 1970, $2 billion; 1971, $2 billion; 1972, $23 billion; 1973, $14 billion; 1974, $3.5 billion; 1975, $43 billion plus; 1976, $66 billion plus; 1977, $65 billion plus, I think, not to mention what, $60 billion plus, this year. That $60 billion, I think that gives cause for attention and careful thought as to whether that's really what we ought to do.

HOLD DOWN FEDERAL DEFICIT

The economic indicators look good. I'm for that. But I would argue to you, sir, that you have got to look at the long-range trend of things, and with the Federal debt at $708 billion, that's neither here nor there, but if you put more and more of these dollars into circulation, and your goods and services don't rise equivalently, you can't blame management, you can't blame labor. And the poor people in my district, their buying power is being ruined by this depreciation of money. The wealthy people in my district are reluctant, more reluctant to make investments and create jobs.

So I would urge you, sir, taking all things into account, use your influence in the direction of holding down the Federal deficit in this and future budgets.

Thank you very much.

Senator SASSER. Thank you very much, Senator Henry, for appearing here this morning and giving us your advice. And I know