TUESDAY, FEBRUARY 1, 1977. THE FEDERAL BUDGET FOR FISCAL YEAR 1978 WITNESSES HON. W. MICHAEL BLUMENTHAL, SECRETARY OF THE TREASURY CHARLES L. SCHULTZE, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS THOMAS BERTRAM (BERT) LANCE, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET Mr. MAHON. The committee will come to order. Mr. Secretary, Mr. Chairman, Mr. Director, we welcome you before the House Appropriations Committee today. This is our required overview hearing for the year. We hope that it will be the beginning of a long and successful relationship between the Committee on Appropriations and the new administration. ADEQUACY OF THE FEDERAL BUDGET In the course of this hearing, we will want to receive your best suggestions and answers as to such questions as the following: What is your view of the budget submitted by President Ford? Is it too high? Is it too low? To what extent is it inadequate? To what extent is it adequate? How can we cope adequately with the problem of unemployment which is of the greatest concern to the Congress and to the country? How are we going to lower the unemployment rate without accelerating inflation? We will want to probe the proposals of the administration with respect to the economic stimulus package. We need to know more about that proposal. What are you specifically proposing? When will these proposals be formally presented to the Congress? When are we going to balance the budget? CONCERN OF THOUGHTFUL AMERICANS WITH BUDGET DEFICITS The budget deficits continue to be astronomical, with no end in sight. This is, of course, very disturbing to all thoughtful Americans, in my judgment. Where are we headed? Is there any hope for a balanced budget during the next few years? In the past, we had talked very much about a balanced budget as one of the means whereby we could secure renewed confidence of the business community and the economy. There are numerous questions of great moment which we will want to present to you during the hearing. Let me explain that we will proceed under the 5-minute rule, and that I will yield to members who seek recognition for a 5-minute period. In order to more fully explore the questions that will be raised we would prefer, of course, to spend more time from the standpoint of the committee member and from the standpoint of each of the witnesses before us today. It will be necessary, however, to make your responses as brief and as much to the point as is reasonably possible. At this point I believe perhaps the best way for us to proceed would be for each of you to take 5 or 10 minutes to make whatever comments you think apropriate, or perhaps to summarize your prepared statements. After that, we will begin recognizing the members of the committee for their questions of the witnesses. I will recognize Mr. Lance first and then will recognize Mr. Schultze and then recognize you, Mr. Secretary, as I understand you had hoped to follow that procedure. BIOGRAPHIES OF WITNESSES At this point in the record, we will insert the biographical sketches of the three main witnesses. BIOGRAPHICAL SKETCH OF W. MICHAEL BLUMENTHAL Werner Michael Blumenthal, chairman of the board and chief executive officer of the Bendix Corp., Southfield, Mich.; residence, Ann Arbor, Mich.; born, Oranienburg, Germany, January 3, 1926; graduated from University of California, Berkeley, Calif., 1951; Princeton University, Princeton, N.J., 1956; holds B.S., M.P.A. in public affairs, M.A. in economics, Ph. D. in economics; married Eileen Polley; children, Ann Margaret, born March 31, 1953; Gillian, born October 28, 1955; Jane Eileen, born November 21, 1957. 1976 to present, chairman and chief executive officer, the Bendix Corp., Southfield, Mich. 1972-76, chairman, president and chief executive officer, the Bendix Corp., Southfield, Mich. 1971-72, president and chief operating officer, the Bendix Corp., Southfield, Mich. 1970-71, Vice Chairman, the Bendix Corporation, Southfield, Mich. 1967-70, president, Bendix International, New York, N.Y. 1963-67, U.S. Ambassador, President's Deputy Special Representative for Trade Negotiations, and Chairman, U.S. Delegation to Kennedy Round Trade Negotiations Geneva, Switzerland. 1961-63, Deputy Assistant Secretary of State for Economic Affairs, Department of State, Washington, D.C. 1957-61, vice president and director, Crown Cork International Corp., Jersey City, N.J. 1954-57, research associate, Industrial Relations Section, Economics Department, Princeton University. 1953-54, fellow, Social Science Research Council. Elected to Phi Beta Kappa, 1951; recipient of Management Man-of-the-Year Award-1974; United Negro College Fund, Annual Medallion Founders Award. Published writings: "Codetermination in the German Steel Industry"; "Disability Retirement in Industrial Pension Plans"; "A World of Preferences". Officer, director or trustee of numerous business and nonprofit organizations and educational institutions, including the Equitable Life Assurance Society of the United States, Princeton University the Council on Foreign Relations, and the National Committee on United States-China Relations, Inc. THOMAS BERTRAM (BERT) LANCE Thomas Bertram (Bert) Lance, 45, was sworn in January 23, 1977, as 23d Director of the Office of Management and Budget (OMB). As head of the agency, the former Georgia banker serves as President Carter's chief budget officer-responsible for the financial plans under which the Nation spends more than $400 billion each year. The OMB Director's other responsibilities include coordination of proposed legislation, to insure that all possible options reach the Oval Office before decisions are made by the President on proposals for new laws. In addition, Mr. Lance's post includes working to improve Government organization and management, and seeking ways to reduce Federal paperwork. He is publisher of the annual OMB "Catalog of Federal Domestic Assistance" which currently lists 1,044 major Government programs. Other duties include issuing the Federal circulars on such topics as statistics and advisory committees and improving Federal coordination with State and local governments. His agency publishes the guidelines for the economic impact statements now required before major actions are taken by Government agencies. He serves on many policy committees. The new Director was president of the National Bank of Georgia (30 branches, 300 employees, $415 million in total assets) when President-elect Carter asked him to join the Government. He had worked closely with the President-elect when Mr. Carter was Governor of Georgia, serving as commissioner of the department of transportation and helping reorganize the Georgia State government. Mr. Lance resigned as transportation commissioner in mid-1973 to run for Governor, placing third in the Democratic primary in 1974. Following the campaign he joined the National Bank of Georgia in January 1975. He was born June 3, 1931, in Young Harris, Ga., the son of a Methodist college president, Dr. T. J. Lance. Mr. Lance studied at Emory University, University of Georgia, Louisiana State, and Rutgers School of Banking. His first job was with the Calhoun First National Bank of Calhoun, Ga., where he went to work as a teller at the age of 20 in 1951. He became president in 1963. He married the former La Belle David September 9, 1950. They have four sons, Tram, David, Stuart, and Beverly. His office is room 252, Old Executive Office Building, Washington, D.C. 20503. BIOGRAPHICAL DATA OF CHARLES L. SCHULTZE PREVIOUS AND PRESENT POSITIONS Staff member, Council of Economic Advisers, 1952-58; associate professor of economics, University of Indiana, 1959–60; professor of economics, University of Maryland, 1961 to present; Assistant Director, U.S. Bureau of the Budget, 196265; Director, U.S. Bureau of the Budget, 1965 to January 1968; and senior fellow, Brookings Institution, 1968 to present. DEGREES B.A. and M.A., Georgetown University, 1948, 1950; and Ph. D., University of Maryland, 1960. AFFILIATIONS Chairman, Board of Trustees, The Urban Institute (1976- ); member, American Academy of Arts and Sciences; member, Research Advisory Board, Committee for Economic Development; member, National Institute of Medicine; and vice president, American Economic Association (1975). PUBLICATIONS "Recent Inflation in the United States," 1959; "Price Costs and Output in the Postwar Period," 1960; "National Income Analysis," 1964; "Prices and Wages" (with J. Tryon) in The Brookings Quarterly Econometric Model of the United States, 1965: "Budget Alternatives After Vietnam" in Agenda for the Nation, 1968; "The Politics and Economics of Public Spending," 1969; "National Income Analysis" (3d edition), 1971; Coauthor "Setting National Priorities" (4 volumes), 1970, 1971, 1972, and 1973 with Fried, Rivlin and Teeters; and Coauthor, Pollution, "Prices, and Public Policy" (with Allen Kneese), Brookings, 1975; "Higher Oil Prices and the World Economy: The Adjustment Problem" (with Ed Fried), Brookings, 1975; "Falling Profits, Rising Profit Margins and the Full-Employment Profit Rate," Brookings Papers on Economic Activity 2:75. Coeditor "Setting National Priorities: The Next Ten Years," with Henry Owen, Brookings, 1976; The Godkin Lectures, November to December, 1976, Harvard University, "Public Use of Private Incentives" forthcoming (Brookings 1977). All right, Mr. Lance, Director of the Office of Management and Budget, you have a full-time job before you, and we will expect to cooperate with you in the interests of the country. Will you proceed? STATEMENT OF DIRECTOR OF OFFICE MANAGEMENT AND BUDGET Mr. LANCE. Thank you, Mr. Chairman and members of the committeee. I am pleased and privileged to come before you today to discuss the 1978 budget from the perspective of the new administration. As you know, we are working now to develop specific proposals to alter the 1978 budget transmitted to the Congress on January 17, 1977. I know you and your colleagues in the Senate are anxious to have the broad outlines of these revisions by February 15. While I cannot promise that we will have everything completed exactly by that date, we are working very hard and will try to come as close to your goal as we possibly can. President Carter's 1978 budget revisions will, of course, reflect his major program initiatives and fiscal priorities, although time will prevent making extensive changes to the original budget. These initiatives and priorities are, he believes, essential to laying the groundwork for a healthy economy and fulfilling his commitment to the aspirations of the American people in the years ahead. At the core of the President's budgetary program is the goal of revitalizing the economy and establishing a balanced, effective approach to curbing unemployment. Toward this end, the President has proposed a series of specific fiscal initiatives that, taken together, constitute an economic recovery package. As you know, the economy has not been performing well, particularly in the second half of the last calendar year. Final returns for the fourth quarter are not in yet. There are signs of some improvement in the recovery during recent months, such as the inceases in industrial production in November and December. However, our best judgment is that the economy requires help through a balanced program of further economic stimulus. This program, which is being conceived as a 1977 and a 1978 effort, will add a modest general stimulus to the economy through $50 per person rebates, tax reduction, and larger countercyclical grants to States and localities. It will also provide more pinpointed creation of jobs through expanded public service employment, additional funds for local public works, and increased youth training under the Comprehensive Employment and Training Act (CETA). The administration is proposing tax rebates on calendar year 1976 liabilities of $50 for each taxpayer and each of the taxpayer's dependents, as well as a $50 payment for earned income credit recipients and others who have no income tax liability. Together these measures total $9.6 billion in 1977. Further, the administration proposes to provide cash payments, similar to tax rebates, of $50 to each social security recipient and each supplemental security income (SSI) recipient. The program also calls for substituting a single standard deduction of |