INCREASED FUNDING FOR HUMAN RESOURCES DEVELOPMENT

With respect to the proposed budget, itself, it is gratifying to note that most of the net increase of 2 percent-after adjustment for inflation-in proposed expenditures is going for human resources development. It's also gratifying to note that the Small Business Administration, and the Office of Minority Business Enterprise, are being budgeted for increases in funding, and especially OMBE, since this will be the first increase in several years. Increased funding to SBA and OMBE should better assure fuller participation of minority business in the free enterprise system of this Nation.

I previously indicated my delight with the reliance on the private sector to shoulder the major responsibility for the tremendous job-creation task in our economy with, of course, appropriate assistance from the Federal Government.

NEW URBAN POLICY

As a black economist, there are some details of the proposed fiscal year 1979 budget that concern me. I shall mention the two major concerns. I seriously question the effectiveness of a new urban initiative policy, one of the strategies designed to meet essential human needs, expressed as a priority in the President's budgetary message, when no specific funds are being requested for this new urban initiative policy. The planned revitalization of the cities involves many new jobs, inducements to industry to relocate in the cities, and incentives for new and improved urban housing, and Federal grants to encourage joint planning and tax sharing by cities and their suburbs. Estimates of the cost of this plan range from $6 billion and $10 billion. the apparent funding request in the budget which could be diverted in whole or in part to the new urban policy are the $400 million for UDAG program, the same as fiscal year 1978, the increase of $150 million-to $3.75 billion-for the basic community development block grant program, and the President's emergency fund of $1.7 billion.

LACK OF FUNDS FOR URBAN PROBLEMS

My concern about the apparent lack of funds to deal with the Nation's urban problems stems from the fact that blacks are urban dwellers and more specifically central city dwellers to a greater extent than whites. According to the 1970 census, more than onehalf of all blacks are central city dwellers as compared to just over one-fourth of all whites. Moreover, blacks are concentrated in the Nation's more rapidly deteriorating cities such as New York, Newark, Chicago, Cleveland, Los Angeles, Philadelphia, Detroit, Pittsburgh, St. Louis, and so forth.

ADMINISTERING AGENCY

I'm also concerned about the lack of definitiveness as to what agency will administer the new urban policy or program. Dividing the responsibility between different agencies will assure ineffectiveness of and inefficiencies in the program on the basis of abundant past experience.

27-922 O 78-6

FOREIGN POLICY

As an Afro-American economist, I am also disturbed by the continuing low priority accorded black Africa in the foreign policy of the United States. An expression of official United States interest in black Africa in the past is afforded by statistics on our economic assistance to less-developed countries. If one takes a look at the period between 1949 and 1972, Africa got 6 percent or our foreign aid in 1970; 9 percent in 1977, and 17 percent in 1978.

NO CHANGE IN ECONOMIC ASSISTANCE

In the President's fiscal 1979 budget, it is evident that there is no feeling of need to effect any changes in our foreign policy toward black Africa, so far as our economic assistance to the less-developed world is concerned.

For example, if one takes a look at the figures for assistance to the Third World, the African Development Bank is slated to receive less than 1 percent of total financial assistance to the Third World. This to me is disappointing. I, personally, had hoped the current administration's interest in human rights and human justice would recognize the advanced economic development of the United States and corresponding backwardness of black Africa as directly related to the ready and lucrative market in this country during slavery for the physically and mentally best blacks that Africa could provde. My disappointment is compounded by the tacit approval by the U.S. Government of American private enterprise encouragement to the despicable apartheid policy of the Republic of South Africa.

Thank you, Mr. Chairman.

Senator SASSER. Thank you very much, Dr. Coles.

[Prepared statement of Flournoy A. Coles, Jr., follows:]

PREPARED STATEMENT OF FLOURNOY A. COLES, Jr.

Senator Sasser, I appreciate your invitation to react both to the President's fiscal year 1979 budget and to the modifications in the budget-making process made possible by passage of the Congressional Budget and Impoundment Control Act of 1974.

IMPROVEMENTS IN BUDGETMAKING PROCESS

The procedures established under the Congressional budget reform law result in such obvious improvements in the budget-making process that it is now difficult to perceive how efficiency in that process was achieved prior to the passage of Public Law 93-344. I especially want to single out modifications relating to (1) providing for second and subsequent Congressional budget resolutions, which make budgetary revisions possible in the light of changing economic conditions and national needs, (2) five-year budget projections at the beginning of each fiscal year, which provide a "baseline from which Congress can consider budget alternatives in its deliberations on the next annual budget," and (3) the scorekeeping and other reports of the Congressisonal Budget Office, which provide a means whereby interested citizens can become better informed of budgeting and budget-related matters of the Federal Government. I sometimes deplore the fact that the CBO cannot make recommendations on matters in which they have demonstrated obvious competence in their outstanding and impartial analyses.

I now turn my attention to what I presume to be the major purpose of this hearing-i.e., the President's fiscal year 1979 budget message.

DETERRENTS TO ECONOMIC GROWTH

At the outset, I must confess that I am not at all comfortable with the economic assumptions with respect to economic growth, inflation, and unemployment, on

which the President's budget is based. The key assumption is the rate of economic growth, since, if a desired rate of growth can be achieved, progress can be made toward solving the twin problems of upward price movements and joblessness. In constant 1972 dollars, growth rates of 4.7 percent for calendar year 1978 and 4.8 percent for calendar year 1979 are assumed. In support of this assumption, CEA Chairman Schultze, in his testimony before the Senate Budget Committee on February 1, pointed to increased inventory investment and the 1977 stimulus programs as major causal factors. In less than two weeks after Chairman Schultze's testimony, acccording to Business Week (February 13, 1978), the CEA released a report which casts doubt on the ability of the economy to grow at the rate assumed in the President's budget proposal. The major culprit is seen as productivity. If an upturn is not realized in the rate of productivity in 1978 over 1977-and such an upturn is reportedly not expected by the CEA-the assumed rates of growth for 1978 and 1979 may be only wishful thinking. Other deterrents to growth may include sluggish increases in consumption, potential weaknesses in the housing sector related to already high single house starts and likely increased interest rates, the increasing budget surpluses at state and local government levels, the U.S. foreign trade deficit, only moderate increases in business investment, and more restrictive fiscal policy under current legislation because of scheduled increases in social security taxes.

WILL TAX CUT SPUR CAPITAL SPENDING?

The President's proposed tax program-i.e., the Tax Reduction and Reform Act of 1978-is viewed as essential to achieving the assumed or forcasted rate of economic growth. Of the net proposed tax reduction of $24.5 billion, $19.7 billion (more than 80 percent) will be for individuals. Two questions about this division of tax cut benefits arise. First, will the amount of the cut for corporations be sufficient to induce them to invest in new plant and equipment in order to achieve productivity levels necessary to realize the assumed rates of economic growth after currently unused productive capacity is used up? Inadequate and sluggish capital spending has been a problem for a decade or more, and is often cited as a factor in our inflationary and balance-of-payment problems.

JOB-CREATING EFFORTS

The other question is whether the tax relief to the business sector is sufficient to induce it to create jobs in areas of high employment. As a black economist, I have an understandable interest in job-creation, since blacks suffer twice as much from unemployment as do whites, and black youth suffer more than three times as much as do white youth.

In this connection, I applaud the President's intention to rely on the private sector to create the jobs needed for the hard-core unemployed-although providing for a continuation of the public service jobs program for another year. I have serious doubts, however, that the $400 million requested in the budget is enough to assure success of the job-creating efforts.

BLACKS RECEIVE LESS BENEFITS FROM TAX CUT

Further to the proposed tax cut, it is estimated that about three-fourths of the net tax reduction would go to families with incomes between $10,000 and $30,000, with the major share of this going to families with incomes between $10,000 and $20,000. Here, again, as a black economist, I have a concern. In 1975, the median black family income was $8,779, as compared with a median of $14,268 for white families. Blacks, thus, will not benefit as much as whites since more than 50 percent of black families have incomes below $10,000 a year.

With respect to the proposed budget itself, it is gratifying to note that most of the net increase of 2 percent (after adjustment for inflation) in proposed expenditures in fiscal year 1979 over fiscal year 1978 is going for human resource development, since people are a country's greatest resource. It is also gratifying to note that the Small Business Administration and the Office of Minority Business Enterprise are being budgeted for increases in funding-and especially OMBE, since this will be the first increase in several years. Increased funding to SBA and OMBE should better assure fuller participation of minority business in the free enterprise system of this Nation. I previously indicated my delight with the reliance on the private sector to shoulder the major responsibility for the tremendous job-creation task in our economy-with of course, appropriate assistance from the Federal Government.

NEW URBAN POLICY

As a black economist, there are some details of the proposed fiscal year 1979 budget that concern me. I shall mention the two major concerns. I seriously ques

tion the effectiveness of a new urban initiative or policy-one of the_strategies designed to meet essential human needs, expressed as a priority in the President's budgetary message-when no specific funds are being requested for this purpose. The planning revitilazation of the cities involves many new jobs (some of which are to be earmarked for the hard-core unemployed and unemployed youth), inducements to industry to relocate in the cities, incentives for new and improved urban housing, and Federal grants to encourage joint planning and tax sharing by cities and their suburbs. Estimates of the cost of this plan range between $6 billion and $10 billion. The apparent funding requests in the budget which might be diverted, in whole or in part, to the new urban policy are the $400 million for the UDAG program (the same as in fiscal year 1978), the increase of $150 million (to $3,750) for the basic community development block grant program, and the President's "emergency" fund of $1.7 billion. My concern about the apparent lack of funds to deal with the Nation's urban problems stems from the fact that blacks are urban dwellers, and, more specifically, central-city dwellers, to a greater extent than whites. According to the 1970 Census, more than one-half of all blacks are central-city dwellers, as compared to just over one-fourth of all whites. Morever, blacks are concentrated in the Nation's more rapidly deteriorating central cities (i.e., New York, Newark, Chicago, Cleveland, Los Angeles Philadelphia, Detroit, Pittsburgh, St. Louis, etc.). I am also concerned about the lack of definitiveness as to what agency will administer the new urban policy or program; dividing the responsibility between different agencies will assure ineffectiveness of and inefficiencies in the program, on the basis of abundant experience.

FOREIGN POLICY TOWARD BLACK AFRICA

As a black American and a black economist, I am also disturbed about the continuing low priority accorded black Africa in the foreign policy of the United States. An expression of official Unied States interest in black Africa in the past is afforded by statistics on our economic assistance to less-developed countries:

In the President's fiscal year 1979 budget request, it is evident that there is no feeling of a need to effect any changes in our foreign policy toward black Africa, so far as our economic assistance to LDCs is concerned.

This less than one percent interest in black Africa, as compared with our total official financial assistance to the Third World, is disappointing. I, personally, had hoped that the current Administration's emphasis on human rights and human

justice would recognize that the advanced economic development of the United States, and the corresponding economic backwardness of black Africa, is directly related to the ready and lucrative market in this country, during Slavery, for the physically and mentally best blacks that Africa could provide. My disappointment is compounded by the tacit approval by the United States Government of American private enterprise encouragement to the dispicable apartheid policy of the Republic of South Africa.

There are other aspects and implications in the President's fiscal year 1979 budget proposal that deserve comment. These include the deficit and what Business Week (February 6, 1978) terms the "fragile base for Carter's plan." These are matters in which my colleague, Dewey Daane, and others testifying today are more competent than I.

Senator SASSER. Next we will call on Dr. Charles Garrison of the Department of Economics at the University of Tennessee in Knoxville.

Dr. Garrison.

STATEMENT OF DR. CHARLES GARRISON, DEPARTMENT OF ECONOMICS, UNIVERSITY OF TENNESSEE, KNOXVILLE, TENN. Dr. GARRISON. Thank you, Senator, for the opportunity to

appear.

TAX CUT

In addressing the question of the appropriateness of the administration's tax reduction proposals, I believe that tax reduction for business and consumers is indeed desirable and even necessary if the Nation is to maintain an adequate rate of real economic growth in the private sector over the next 2 to 3 years. In the absence of such tax reduction, we are in fact assured that the tax burden will rise due to higher social security taxes and higher effective personal income tax rates as nominal incomes rise. If we allow the tax burden to rise, a slowdown in spending and output growth is inevitable. I should interject at this point that I am less concerned with the next few months than with the longer run, the next 2 or 3 years or longer. I think that is the way we need to view this question.

OPPOSITION TO TAX CUT

While the administration's proposals for tax reduction have obtained fairly widespread support, there does exist important opposition. My approach today is to address the arguments of these opponents, for I believe that their analysis contains basic weaknesses which should be brought to the attention of policymakers.

One source of opposition is among those who would prefer acrossthe-board personal income tax cuts rather than reduction aimed primarily at lower- and middle-income groups.

EFFECT ON AGGREGATE DEMAND

This is an important issue. I don't mean to downplay that, but I do not believe it is crucial from the standpoint of the effect of tax reduction on aggregate demand, and that is the question I am addressing.

I think that aggregate demand in our economy will be stimulated by either approach to tax reduction, that is across-the-board or oriented toward specific groups.