I do hope you stick by it. This is an inviting year to do, because you have a smaller deficit of course, but certainly from the standpoint of economic analysis, it is enormously helpful, recognizing, as you properly point out, that there are still defects here.

I also commend you on the results of budgetary policy in recent years, which you have spelled out, in terms of growth, in terms of employment, in terms of real income, after allowing for inflation. After all, this committee is a critical committee and should be, but we tend to overlook the good things about the economic progress, and you properly point them out.

The other commendation I would like to make is in regard to the PPBS. This is one of the most encouraging developments, I think, in Government budgetary policies.

The Defense Department has made wonderful progress in developing systems for comparing costs and benefits, being in a position for the first time, I think, in the history of our Government, really, to determine properly how best our resources can be allocated to meet particular goals with the lowest dollar cost. We have not done this before.

I hope this committee can explore this in detail, to determine how we in Congress can contribute to it, because with a more critical view, I think we can make a much greater contribution than we would if we did not really understand what this PPBS thing is. And I do not think we understand it nearly well enough today, so I hope you can help us on that line.

These are the things I think you are primarily involved in, and, therefore, I think you deserve a lot of commendation.

You can't be held responsible for the position the Congress and the President takes on how much of our resources the Federal Government should spend. You are a champion of that position; you have to be, but I think in these areas of efficiency, you have done well.

There is one other aspect of this efficiency that I would like to mention that I think you might give more attention to, and that this is this measuring productivity in Government departments. Kermit Gor don, when he was your predecessor, published a book in this area which is most encouraging.

Mr. SCHULTZE. That is correct.

Chairman PROXMIRE. We can measure productivity in some Government departments which are doing amazingly well. We make the ridiculous assumption that Government employees do not improve their productivity, as I understand it, in our economic assumption, and yet we find vast improvement in some areas. If we can put little more stress on this and have this developed in more departments than it has been, I think that this is a very promising avenue.

Now, let me get into an area where I am a little more critical. Yesterday, we developed an argument that the Vietnam war in this fiscal year had been underestimated by $10 billion. That the estimates had been a year ago that there would be a $10 billion cost for the Vietnam war, and it is $20 billion for this fiscal year.

Of course, this had a devastating effect on our economic policy. We failed to increase taxes as perhaps we might have done; however, I would have been opposed to that.

We failed to cut spending, as I think we should have and would have done if we had these figures before us, if we had an accurate, true reflection of just what the budget was going to be, and I think it would have saved us an awful lot of difficulty with inflation and high in

terest rates.

I want to ask you, as Director of the Bureau of the Budget, what responsibility do you feel you have to secure accurate estimates for the President and the Congress and Pentagon on the cost of the Vietnam war?

How can you pursue the figure that they give you, to determine whether it is accurate or not?

Mr. SCHULTZE. Let me make several points, in answer to that, if I can, Senator Proxmire.

Let me go first to the substance of your point with respect to the impact of underestimating Defense spending on economic policy and economic consequences, and then to the role of Budget Director.

First, I think you have clearly got to put this in the context of last year's economy. If you will look at last year's economy, you will find that the main inflationary pressures were in being during the first 7, 8, 9 months of the year. Starting in August, the Wholesale Price Index stabilized and began to recede after September. Consumer food prices began to recede after August. The Consumer Price Index itself began to inch up at a much lower rate after October. So, pretty clearly, the main inflationary pressures in the economy were during the first 7 to 9 months.

Chairman PROXMIRE. Beginning in February. In January, prices did not rise. It was in February.

Mr. SCHULTZE. They were rising to some extent in late 1965. And then there was a little tapering down and then they rose again.

Now, let us look at what happened to the Federal budget, as we predicted and as it actually occurred, taking the NIA measure.

Chairman PROXMIRE. I do not want to be rude, but my question was as to what your responsibility is in getting information from Mr. McNamara and the Defense Department, whether you can go behind his figures, or you do go behind them, or not. That is what I want to know. I want to pursue this. You can make any answer you wish, but if you are responsive, what I want to know is whether you have the right and whether you feel you have the responsibility to challenge figures that come from the Pentagon.

Mr. SCHULTZE. Then, let me reverse the order of my answer. I was going to talk first to the substance and then the procedure.

I will switch and talk first to the procedure and then come back to the substance.

Essentially, there is no simple answer to this, Senator.

In the first place, with respect to the Defense Department, the Bureau of the Budget pursues a different procedure than it pursues with respect to other departments. Other departments submit a formal budget request to the Bureau of the Budget which we review and on which we present recommendations of our own to the President. In these cases there is a formal exchange of views back and forth between us and the agency head before we see the President, and then together with the President.

In the case of the Defense Department, the Bureau of the Budget staff and then later I and my top aids work right with the Secretary of Defense and his staff in his overall budget recommendations to the President. In other words, instead of the Secretary formally submitting a budget request to us and the Bureau reviewing it separately, we work together with him in developing his presentation to the President.

Chairman PROXMIRE. So, you work with him in determining that the cost of the Vietnam war will be $10 billion.

Mr. SCHULTZE. We work with him in determining-
Chairman PROXMIRE. It was a joint error, so to speak.

Mr. SCHULTZE. I accept whatever responsibility comes out of this procedure. Now, let me go ahead on this.

The next point is that the expenditures with respect to Vietnam could not really be determined with any accuracy until the requirements were determined, and those requirements were not determined or pinned down until very late in the year, for two essential reasons, and I think the first one particularly you would be quite interested in. Chairman PROXMIRE. You knew the requirements involved, 400,000 troops by the end of the year. That was known.

Mr. SCHULTZE. Gradually, that became known; that is correct. Let me go back a little, if I may.

In October and November of 1965 when the Defense budget for fiscal 1967 was being prepared, our own buildup in Vietnam was literally on a 60° curve. In 120 days we shipped 100,000 men overseas. At the same time, according to actual reports and intelligence estimates, the Vietcong and other strength was rising also at a 60° angle. At that time, we just did not know where this was going to level off.

Rather than present a budget request then or even later in the year, based on unknown requirements, the assumption was made that we would finance the war just through 1967 and come back in later for a supplemental if the war was going to go on longer.

Chairman PROXMIRE. But throughout that period, you must have realized again and again and again that you were going to be off and you did not tell us. There were no figures given.

Mr. SCHULTZE. I disagree.

Chairman PROXMIRE. No opportunity for the Congress to modify its policy. Congressman Laird and Senator Stennis spoke out on this, nailed it down. They turned out to be dead right and all we got from the administration was that they were wrong; they stuck by their figures.

Mr. SCHULTZE. In February of last year, Secretary McNamara, in appearing before a joint session of the Senate Armed Services and Defense Appropriations Subcommittee, pointed out that if the war were going to have to continue beyond the end of 1967, he was going to have to come back in for more money. In August, he told the same committees that it was pretty clear at the time that a supplemental was going to be necessary but he did not know the amount, and I did not know the amount.

In September and October, in appearing before the House Ways: and Means Committee and the Senate Finance Committee, to ask for the suspension of the investment credit, Secretary Fowler and I both pointed out unless there was a dramatic breakthrough in thesituation in Vietnam, there would be additional need for funds.

Now, the reason that we did not send up, did not want to send upand I fully agree with Secretary McNamara in not sending up-a supplemental request at the time, hinges on two major points.

First, one of the most important tools that a Secretary of Defense has in trying to provide efficient budgeting in the Pentagon is not to ask for a dime that is not associated with specific requirements. Once you break that rule, which has been painfully built up over the years, I personally believe that the control and the effectiveness of these programs in military budgeting would just go out of the window. I sincerely believe that it would have been a major mistake to come up with a supplemental not based on specific requirements, because in doing so you would be breaking a rule with a lot of psychological impact in terms of effective military budgeting that has taken years to get established and made effective. And for the sake of argument, if we could have come up with an estimate, it would have been a wideranging one, and it would not have been based on specific requirements in terms of specific attrition, specific amounts of ammunition required, specific numbers of bombs needed. It would have been a guess.

That money would have been appropriated, as sure as I am sitting here, and would have been available in a lump sum, and the Secretary's ability to limit spending to specific requirements would have been substantially weaker. So I feel it was a correct decision to wait until the specific requirements were known, although it was a politically unpopular one, and has caused us a lot of trouble.

Chairman PROXMIRE. It was just plain wrong. He was off 100 percent. He said $10 billion and it was $20 billion. He never corrected it. All this talk about how it is more efficient to make an estimate, based on an assumption which is a ridiculous assumption, is just completely beyond me.

I just cannot understand how in the world you can say it was right, or that it was courageous, or that it was unpopular. It was completely wrong. It destroyed all of our economic policy for that whole

year.

Mr. SCHULTZE. May I come back to that? I would like to, very much.

Chairman PROXMIRE. I want to apologize for the fact that I have gone over my time, and also, that I must leave, because I have to attend the meeting of the Senate Judiciary Committee. I will be back. I want to pursue this. You are an excellent witness and you can give us good answers in this area, but I am just going to leave now and yield to Congressman Reuss, who will chair the meeting when I

am gone.

Mr. SCHULTZE. Senator, I would like, sometime when you come back, to make a particular point in the record.

Representative REUSS (presiding). I will see to it, if Chairman Proxmire does not come back, that you will be given an opportunity to be heard on that.

Mr. Rumsfeld, you are recognized.

Representative RUMSFELD. Thank you, Mr. Chairman.

Mr. Schultze, I have been very interested in the discussion you have had with Senator Proxmire. I am curious to know, exactly how you, as you suggest, share the responsibility for the decisions that were

made with respect to estimates of the Department of Defense. What has been done since that time to see that your joint capability to accurately forecast or even reasonably accurately forecast will be improved in the coming year?

I sense from your statement that you share my concern about the credibility of the U.S. Government, about the accuracy of your previous budget estimates and about the believability of statements concerning these difficult and technical matters, which I grant are difficult to predict and are subject to change.

I am pleased to see there is going to be a study made to see how the budget can as accurately as possible reflect what is in fact going on in this country, but I would like to hear what steps, specifically with respect to DOD, have been taken.

I asked Mr. Ackley yesterday if DOD was being pulled into this working group, and he indicated not.

Mr. SCHULTZE. May I respond?

Let me make a couple of points. First, I want to make it very clear for the record that I do not and should not share responsibility for the determination of how many men we need in Vietnam, nor how many planes. That is not my responsibility. In translating those determinations into the budgetary impact, of course I do have a role. I want to make it clear that the Budget Director is not deciding what General Westmoreland needs. That is obvious.

On the next point-I do not know whether you are aware of it, but you know you cannot fight a war without supplementals. There were seven of them during the Korean war. Nobody can predict how these things are going to come out and

Representative RUMSFELD. You say nobody can do it. There were people in Congress doing it over and over again. When the original request came out, three or four Members of the House and Senate took the floor and pointed out that it was outdated then.

The construction activity that was programed to sustain a troop commitment that was considerably in excess of that for which funds were being requested.

I knew that, and I am not on the Armed Services Committee.

Mr. SCHULTZE. As I indicated earlier, Secretary McNamara said time after time that if we were going to finance the long leadtime procurement we would need if the war were to continue past June 1967, "I am going to have to have more money and I am going to come back in for it." He said it time after time. And he also said, "When our commitments are rising at a 60° slope, I can't predict where they are going to level off."

Now, where are we now compared to a year ago? Unlike a year ago, the rate of our planned buildup is moving up much more gradually. It is now possible, with 18 months of combat experience behind us, to assess somewhat better what the requirements are, barring a massive change inthe conditions of the war. It is also possible to make a much better set of assumptions with respect to combat attrition, and the like.

As a consequence, the 1968 budget request of the Department of Defense, unlike the 1967 request, provides all of the funds necessary to procure the long leadtime items which will be necessary should the war continue.