I think that the question remains-and Mr. Lance put it well, and we're not criticizing-what is the right economic package for the country? It's a tough call. We do know, starting out from the figures we've heard, ranging from a $57.2 billion deficit to close to a $70 billion, that we know we're going to the market and asking for $10 or $15 billion more. Thus, the questions I have specifically relate to the impact of such deficits on the credit market. That's why I say I think it starts here today, Mr. Blumenthal.

In that regard, one could not help but notice in the Wall Street Journal yesterday a lead story about the short break in the bond market that has taken place, and is continuing today. The article says the los so far to U.S. securities is a staggering 5 points, or $50 on a $1,000 bond.

The article went on to say that this particular dealer, at least, attributed this drop to the prospects of a whopping Federal budget deficit in the first year of the Carter administration.

I just wonder, Secretary Blumenthal, and I have read your statement, if you see the rationale for the fact that we are only at 80percent capacity and so forth. And I wonder if you would care to comment on this bond market drop, the sharp drop we have had.

Secretary BLUMENTHAL. Well, I don't want to quarrel with the experts who write in the Wall Street Journal on the bond market. I long ago gave up quarreling with those that write on the stock market. They always have a great explanation after the fact, but they don't seem to be able to tell us beforehand what's going to happen. which would be much more profitable for those of us not presently in Government, I should add.

Seriously. I think we have to recognize that the bond market has been quite strong, that yes, there has been what I would regard as probably quite temporary weakening. It is modest, really. And it seems to me that when it becomes clear that the program is not in fact inflationary, that there is plenty of capacity to absorb it, that indeed that capacity is standing idle, that that will reflect itself in the indicators, including the market indicators. And I really put my faith in that.

So I look at the bond prices every day, too. I take note of that. I don't know why a particular movement occurs one week as compared to another. We'll just have to wait and see. But I'm confident there will not be an inflationary impact and that those expectations will work themselves through in the market amongst the traders.

Mr. STANTON. Mr. Chairman, I would like to put that article from the Wall Street Journal in the record.

[The newspaper article referred to follows:]

[From the Wall Street Journal of Feb. 1, 1977]

FOR THE BOND MARKET, 1977 IS STARTING OUT AS YEAR OF THE BEAR AFTER A STRONG PERFORMANCE IN 1976, PRICES PLUNGE; FEAR OF INFLATION HURTS; WILL FIRMS HALT EXPANSIONS?

NEW YORK-If you were in the bond market last year, take credit for being a shrewd investor. If you are still in the market, maybe you're not so shrewd. The reason: Bond prices over the past month have plummeted in a sudden and unexpected reversal by a market noted for its price stability.

The bond market in 1976 posted its strongest performance ever. Corporate bonds provided an average return of almost 20%, counting both interest and

price appreciation. That roughly matched the gain on common stocks, which are generally riskier. Municipal bonds did well, too. Between Jan. 1 and Dec. 31 of last year, the price of a typical tax-free municipal bond rose by about $170 for each $1,000 of its face amount.

That strength had been expected to extend well into 1977. "Smooth sailing in January" was the cheerful headline over a market commentary written Dec. 30 by a leading analyst, Henry Kaufman of Salomon Brothers. Most other experts were equally bullish. A better headline might have been "Rough Seas Ahead." Since the beginning of this year, bond prices have fallen continuously. The Small Investor

Of course, for some small investors, the ups and downs of the market don't matter much. Such individuals often buy bonds for their yields and plan to hold them to maturity rather than sell them. Thus, price fluctuations in the market are of little interest to these people.

But most bonds are held by institutional investors, such as pension funds and life insurance companies. And for these investors, it's a different ball game. They generally don't hold bonds to maturity; they buy and sell bonds in an attempt to maximize their total return, which takes into account both interest and price appreciation. So these investors aren't happy to see the value of their bond portfolios decline because of lower prices.

Obviously nobody knows for sure what will happen next. But if bond prices continue to fall-and many analysts think they will-the results will be more than a loss of value for investors. As bond prices decline, their yields automatically increase. So companies attempting to raise capital by selling bonds will be forced to offer higher interest rates if they are to be competitive for investors' dollars. The higher interest rates, of course, mean higher costs, which, in turn, could force companies to raise their prices for products and services.

For example, Commonwealth Edison Co. recently sold $180 million of bonds at an interest rate of 8.25%. That's about 0.65 percentage point higher than it could have obtained late last year. That difference, which may not look large to the average person, will raise the Chicago utility's interest payments by about $1.2 million a year. And over the 30-year maturity of its bonds, the difference will mean $36 million.

As a result of situations like that, some companies may have second thoughts about going ahead with planned expansions. Several bond offerings already have been postponed this year because of the abrupt change in market conditions. Among them: a $125 million issue by Ohio Bell Telephone Co. and an issue of the same amount by Republic Steel Corp.

Perhaps more significant was the decision by Zapata Corp. to cancel-as opposed to postponing-its $40 million sale of debentures. This issue carried a "speculative" credit rating of single-B (the top rating is AAA). Zapata's cancellation is an indication that many such marginal borrowers now may not be able to afford badly needed public capital.

Supply and Demand

Excessive supplies of bonds, which caught dealers by surprise, have been partly responsible for the swing toward lower prices and higher yields. For example, many companies rushed into the bond market to take advantage of the relatively low interest rates that prevailed until the end of last year. As a result, about $2.7 billion of new corporate bonds were offered to investors in January; that's substantially more than the $1.8 billion anticipated earlier.

This unexpected influx of new issues has also contributed to a selloff in dealers' inventories of bonds and other debt securities. These inventories had increased substantially late last year.

Another important cause of the bond market's setback has been renewed fears of inflation. Such fears make investors hesitant to lock up their funds at current interest rates because inflation would mean even higher rates ahead. There is "an underlying market conviction that the forces of inflation are only precariously restrained," reports Aubrey G. Lanston & Co., a dealer in government bonds.

According to bond dealers, supply and inflation will continue to exert a strong influence on the bond market's future direction. Up till now, the 1977 net new volume for bonds has been projected at well below last year's level. But that may be changing for government bonds. A tentative estimate by the Lanston firm puts the Treasury's new borrowing demands this year at $82 billion to $83 billion, substantially above the $65.5 billion of 1976.

Moreover, Lanston says, "Prospects for a whopping federal budget deficit in the first year of the Carter administration are serving to reinforce the sober tone of the government securities market."

That dispirited tone was evident last week when the Treasury outlined plans to sell $5.8 billion of new notes and bonds this week. Existing government issues immediately plunged about a half-point. That put their net losses so far this year at a staggering five points, the equivalent of $50 for every $1,000 of face amount.

Mr. STANTON. One last question, Secretary Blumenthal.

In your statement which we had a couple of hours ago and was basically the same one that I understand you gave before the Appropriations Committee, there appears a table 5 on the last page. You make some projections on that table 5, and down at the bottom in a footnote you say: Projections assume Consumer Price Indexes of 179.11 in 1977, 198.26 in 1979.

Excuse me, this is table 4.

Secretary BLUMENTHAL. I'm told that-I'm sorry. My tables are numbered differently than yours. That's why I am fumbling.

It is based, I am told on a 5-percent increase per year.

Mr. STANTON. I don't want to be picayune. I didn't know. I just figured the 179 and 174 projected into 2.75-percent Consumer Price Index in 1977.

Secretary BLUMENTHAL. But it is more than 1 year. It is 1977 to 1979. It is 2 years. Or 3 years, 1977, 1978 and 1979.

Mr. STANTON. Well, to go in 1 year, my figures, it was 2.75 and a 2.55 percent increase in 1978 and 1979. Or would it be double those figures?

Secretary BLUMENTHAL. It is supposed to cover the years from 1977 through 1979, so it is a multiyear.

Mr. STANTON. It is basically in that ball park with the rest of them, with that 5-percent increase, rather than the 2.75 percent?

Secretary BLUMENTHAL. Right.

Mr. STANTON. Thank you very much, Mr. Chairman.

The CHAIRMAN. Mr. Gonzalez.

Mr. GONZALEZ, Thank you, Mr. Chairman.

Thank you, gentlemen, for being with us this afternoon.

To what extent do you have discretion or control or input in the President Ford budget?

Mr. LANCE. We have input on a very short time frame basis. We have to have our amendments to the Congress by February 15-in keeping with the new budget process-so we have a very short period of time to act very quickly in regard to making amendments to the Ford budget for 1978.

There will be some additional time. I understand, to deal with target areas and that sort of is part of the process. But specific changes would have to be made fairly quickly.

Mr. GONZALEZ. So, actually, you really don't have much input into the fiscal year budgetary presentations.

Mr. LANCE. No, sir.

As I have said previously, I think the best way you can say it is that the 1978 fiscal year budget will predominantly be a Ford budget with Carter amendments.

Mr. GONZALEZ. I felt that was it, but I have often wondered just exactly to what extent the President had an input. I know that the first year of President Nixon, 1969, if I remember correctly, he did not make his budgetary presentation until the middle of May.

Mr. LANCE. Well, he had a longer period of time in that year. But now, with the congressional budget process, we have such a short time frame to get our amendments in. And there is one thing I would say in line with that question being raised about the budget. The budget deficit that is proposed in the Ford 1978 budget-that figure needs to be looked at in the area of repricing and seeing just exactly what is implied in that total figure as we go forward. And I just want to point that out this afternoon.

Mr. GONZALEZ. Now, I hope nothing like this happens, and it may be a very improper question, but suppose the administration's plans are vetoed by the Federal Reserve's enactment of a policy that is contrary to the thrust of the administration's program. What could be done-what would you be in a position to recommend to the President if the Federal Reserve decides to veto by refusing to increase the money supply, et cetera, et cetera, the Carter economic package? What could be done?

Secretary BLUMENTHAL. I really hope you will not press me, sir, to speculate on this sad set of hypothetical circumstances that would arise. I really don't foresee it.

I do believe that we can collaborate and that there will be no question of a veto of seeking to do the opposite of what this program intends to accomplish. I think if we can work well and openly with Dr. Burns, as we are doing, and as he is doing and seeking to do, I really think things will work out for the better.

Mr. GONZALEZ. Well, I share your optimism, and I hope so. But I was just feeling-and I don't know, you can check me if I'm incorrect-that no matter what we in the legislative branch may wish to do in supporting President Carter's economic package, if in effect the Federal Reserve through its mechanism acts contrarywise, I don't know of anything that we could do other than to confront Chairman Burns and watch him smoke his pipe and just wring our hands.

Secretary BLUMENTHAL. My impression is that Dr. Burns listens very carefully.

Mr. GONZALEZ. He is a fine gentleman. I don't mean to imply that he isn't. I'm just saying, is there anything in our system that could be resorted to to prevent that type of situation from arising?

Secretary BLUMENTHAL. Well, I've said before, and I know this may not be a view that is shared by everyone, that I do believe that an independent central bank-in this case, the Federal Reserve as we have it in this country, is a good idea. It has its difficulties, has its complications, like all things. It is not uniformly advantageous, but on balance, I think, it is a good thing. So I am quite willing to work within that system and to work with an independent Federal Reserve in believing that we can collaborate and that things can work out rather well. And I think we are going to do that.

Mr. GONZALEZ. Thank you very much. My time has expired.
The CHAIRMAN. Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman.

Let me also welcome you before this committee. I'm sure we will be seeing much of each other in months ahead, years ahead.

Just one thing that caught my eye immediately as I was scanning your statement, since I did not have a chance to read them before coming here. With your tax program, have you talked with Dan

Rather and Mori Safer on "60 Minutes" about your proposal to increase the standard deduction to $2,400 for single people and only $2,800 for couples, for joint returns ?

Secretary BLUMENTHAL, No.

Mr. BROWN. I mean, in levity you're going to be breaking up homes, because you've got to get divorced in order to get a better tax break. I mean, that's a terrible thing for an administration that's trying to keep the family together.

Secretary BLUMENTHAL. I was made aware of this problem this morning. I confess, I was not an expert in the finances of living in sin, but I gather that it is a problem-that it has been a problem prior to this proposal and it remains a problem after the proposal. [Laughter.] And I have a long, detailed answer from my colleague, which I will not read, but I think my response gives the sum and substance of what he says. The proposal itself does not cure this problem.

Mr. BROWN. Moving on, let me talk about your job proposals. What do you contemplate will be the overall reduction in unemployment by the expenditures you contemplate in the three different areas, public works, public service jobs, CETA, and the countercyclical revenue sharing?

Secretary BLUMENTHAL. We have not broken down the impact of each one of the components of the package. We haven't assigned a particular fraction or percentage reduction in the rate of unemployment to each aspect of the program. What we have done is taken the sum total and made our best estimate. I have cited those figures in the testimony.

Mr. BROWN. As I understand it, you contemplate there would be about $6 billion over the 2 years going to public service jobs and training youth slots. In addition, you are going to have $1.1 billion under the counterycyclical revenue sharing.

Now, as you know, if you are using the present act for countercyclical revenue sharing, you are-that money in title II of the Public Works Act says none of it may be used for construction. It has to go purely into public service jobs. So in effect you are providing over the 2-year period $7.1 billion for basically public service jobs. Is that not correct? And $2.2 billion is the expected outlay for your public works jobs.

Secretary BLUMENTHAL. For public works, the expenditures will be roughly $2.2 billion over the 2-year period. The rest of the $9.3 billion, or about $7.1 billion, will be for other types of expenditure programs, including countercyclical revenue sharing.

Mr. BROWN. I'm just a little concerned about the disproportionate amount of the funding that you are contemplating, $7.1 billion as contrasted with $2.2 billion going into public service jobs vis-a-vis public works jobs.

And in that regard, if I may just continue, have you had an opportunity to look at the legislation that was passed by the House last year, sponsored by me and many of my colleagues? It passed the House and was killed in conference. It was called the Supplemental Community Development Employment Assistance Act of 1976.

Secretary BLUMENTIHAL, I'm sorry, sir, but I have not seen it. Mr. BROWN, I would like to have you look that over, especially in view of the fact that you say in your statement: "For local public