Now, let's take a look, for example, at the $5 billion NIA deficit in the first half of calendar year 1967 and assume for the moment that this is a $5 billion NIA deficit at the full employment level. We than ask why can't we have zero at a full-employment level?

I indicated earlier the temporary problem, particularly with the inventory accumulation. But more importantly, what we are talking about in terms of a deficit on the one hand and saving on the other is something on the order of magnitude of a saving rate of about twothirds of 1 percent of GNP.

Now, the extent to which that is related to a change in income distribution gets down to pretty fine judgments, and I am not sure I am prepared to make them. What I am saying is that we are not dealing with very large margins here. We are not dealing with income shares which have moved way off balance with historical levels. There may be a little bit of "out-of-balance" in them but not very seriously, I would say.

Representative REUSS. Were historical levels enough to give us full employment?

The answer is "No."

Mr. SCHULTZE. In some periods, yes; in some periods, no.

Representative REUSS. Therefore, we should not be complacent about the problem.

Mr. SCHULTZE. I agree.

Representative REUSS. And I know you are not complacent.
Mr. SCHULTZE. That is correct.

Representative REUSS. The only thing that worries me is that in the 313 pages of the Economic Report and in the five thousand or so pages of the budget, I do not find any analysis of what I regard as "essential problem" as to whether we can attain employment without inflation, which is what the Employment Act of 1946-which established this Joint Economic Committee-is all about.

Mr. SCHULTZE. I would not have read the Council's section in the whole wage-price area as being indifferent to the problem of full employment without inflation.

Representative REUSS. I did not suggest that. What I did suggest is that I do not find any attempt to grapple with the paradox of the deficit in this amount at this phase of our employment cycle, or with a real searching examination as to whether income shares are such as to put into the pockets of people who will either spend or consume or invest in factory and equipment enough money so that they can in a given period take off the market that which has been produced in the preceding period.

Mr. SCHULTZE. Conversely, Mr. Reuss, in the first half of calendar year 1966 we ran an NIA surplus at an annual rate of about $3 billion, and I do not think at that time you would have said, nor would I have said, that this implied an income redistribution the wrong way, the other way.

And I do not think-it turns out that over periods of time when you get into stable growth and you get this problem-that you can really point to it as an evidence of income distribution. The fact that this year there will be a NIA deficit of $5 billion in the first half, and last year it was a surplus of $3 billion in the first half, that either one of those periods can, per se, be taken to indicate that there is something wrong with the

Representative REUSS. No, I certainly did not suggest a year ago that there was something wrong during that period, with the income distribution pattern, because I would have expected with full employment that there should be the kind of indicated surplus that we had, but what I am concerned with is that now we do have a deficit at a time when we say that we have full employment, and I can't help but think that the income share situation must have been deteriorating in the last year particularly in order to produce that, and I think this is something we have to take a long hard look at.

My time is up.

Senator Jordan?

Senator JORDAN. Thank you, Mr. Chairman.

You mentioned, Mr. Schultze, the fact that the administration reduced the expenditures $3 billion in the 1967 budget. Would you detail that for us?

Mr. SCHULTZE. Yes, sir. I do not know how much detail you want. I have a 20-page list of items.

Senator JORDAN. Give it to us in capsule form.

Mr. SCHULTZE. I will give to you some of the items in capsule form. What the President has done is request-and we set some targets each agency to take the budgets they got from the Congress, either through appropriations or back-door spending, and hold back on the contracts and commitments under that authority.

Now, let me give you some major examples.

The one that I am sure you are familiar with is the $1.1 billion reduction in obligations for the highway program. Our best estimates are that, by reducing those obligations from the budgeted level by $1.1 billion, there will be about a $400 million reduction in expenditures in the year from October 31, 1966, to October 31, 1967. That is a case in point.

A second case in point-I am trying to give you examples, which is really the best way to do it-is the Corps of Engineers. We took virtually every new start that was budgeted in 1967, including 25 new starts that we had recommended and 31 more that the Congress had added, for a total of 56 new starts, and postponed by 6 months the dates on which they would start.

We got the Corps of Engineers starting dates and asked them to postpone these for 6 months, except for programs dealing with urban flood protection, where we imposed only a 3-month postponement.

At the same time we told them to go ahead and buy the necessary land because land prices tend to escalate. And we slowed down the rates of construction of Bureau of Reclamation projects, and projects under the Department of Agriculture's small watershed program.

Another case in point would be in the Department of Health, Education, and Welfare, where two kinds of actions were taken. Right across the board on all grant programs for construction, we had them slow down, hold up, and postpone the date of the letting of the contracts and the making of the grants. Second-another kind of illustration applicable to many of the formula grant programs-around the months of February or March the Department normally circularizes the States and finds out which States have not used up their full grant, call back the unused amounts and reallocate them. This year, we are telling the agency not to reallocate the unused grants and this,

in turn, will mean a reduction of almost $100 million, somewhere in that neighborhood. That is another case in point.

By substantive legislation last year, the President was given $1 billion in special assistance for housing mortgages. This comes right out of the administrative budget. Instead of releasing all of that, he has held back $750 million and only released $250 million.

Now, Senator, I want to point out that in the highway program and some of these others, these represent deferrals or postponements. They are not cancellation of projects, and if the economy should turn out to require it, we may release some of the housing or other funds later, depending on the economic situation.

Senator JORDAN. They are stretchouts.

Mr. SCHULTZE. Yes, sir; they are stretchouts. I would say about half, or maybe a little more, of the total reductions are just stretchouts and the others are actual reductions. But it was never said we were doing anything more than that. We were trying to take some of the heat off the economy last fall, and this is what we are doing, both by deferrals and stretchouts, and by reductions.

But let me be perfectly candid. In many cases, that money eventually will be spent, but it will be stretched out and spent at a slower rate. Senator JORDAN. On another matter, Mr. Schultze, the administration constantly compares the price performance during the Vietnam war with the performance during the Korean war and concludes that we are doing much better this time. Isn't it true that the national defense expenditures at the height of the Korean war were substantially a greater percent of the gross national product than they are now?

Mr. SCHULTZE. That is correct, sir.

Senator JORDAN. And isn't your comparison therefore false to that extent? You compare percentages now; compare amounts now. Isn't it true that it is a distortion when you say it was much greater during the Korean war?

Mr. SCHULTZE. I would make two points in response to that, Senator. First, the differences were also very largely in price behavior. On consumer prices we have had a 4.2-percent increase versus 11 percent during the comparable Korean war period.

Senator JORDAN. Yes.

Mr. SCHULTZE. But second, let's not take the Korean period, but let's go back to the last prior period before 1963-64, a similar 18-month period of peacetime full-employment. The price increases now, even with Vietnam, are better than that.

Now, one final point. I do not want to appear smug or satisfied about it. You know that we did not do as well as we had hoped for. We did not do as well as we should, in many ways, if you want to look at it in that way. We are trying to do better.

Price increases have tapered off a good bit. I did want to put it in perspective, that it is not what we wanted, but still, compared with other periods when we have had this kind of problem, even in a similar 18-month peacetime period of full employment, it racks up pretty well, even though not as well as we wanted it to.

Senator JORDAN. Will you supply for the record, Mr. Schultze, the relevant figures during both the wartime periods, Korean and Vietnam?

Mr. SCHULTZE. Yes, sir; I will be very glad to.
The Budget Bureau subsequently supplied the following table:

Price index changes during comparable Korea and Vietnam periods

Senator JORDAN. Now, referring to your statement, you say:
Our price performance in 1966 is not up to what we had earlier hoped.
Then, you go on to say:

In the last 18 months saw a rise of 4.2 percent in consumer prices and a 3-percent rise in wholesale prices.

Many economists believe that a tax increase should have been implemented about a year ago now. What is your reaction to that now, with hindsight, since you have had a year of operation?

What would have been the effect, say, of a 6-percent surcharge you are recommending now, to take effect in July, had it been implemented a year ago?

Mr. SCHULTZE. I guess it is a little bit easier to do it from hindsight than foresight.

I am not sure, Senator. You have got to remember that we did have tax accelerations; we cut off the excise reductions that were then in order, and there was at the time, although it was fortuitous in the sense it had been enacted earlier, a significant increase in social security taxes.

With all of these together, we pulled some $10 billion out of the economy. I think going all the way back to November and December of 1965, in the context as we then saw it, and even allowing for some further increase in defense spending, although not as much as occurred, I think our policy decision then was right.

We did come in in September with suspension of the investment credit, and with these budget deferrals, which took a lot of the heat off of the economy. If we had put in a tax increase larger than we did, earlier, I am not sure where we would be. We might have been better off for the months of the summer and probably worse off now. So it is pretty hard for me to judge.

I don't think we missed it by to much. Let me put it that way. We took a lot of pressure off the economy.

Senator JORDAN. Are you satisfied year after year running up deficits here at the time when the economy is at its highest level of productivity and achievement we have had in many, many decades? Do you think it is wise to do that in the light of the dire results that are bound to derive from it?

Mr. SCHULTZE. I guess the first thing I would say, Senator, is that given a $22 billion expenditure for Vietnam, in fiscal 1968, to have

budgeted for, on a national income account basis, a $2.1 billion deficit during that period is not bad at all and fits in just about, I think, with the economic requirements.

If we had not had Vietnam, particularly in terms of the speed of the buildup, I am convinced that we would be running a significant surplus, and we may actually have been in the process of talking about a tax reduction. It is a little hard to know what would have happened if something else hadn't happened, I admit.

But you know, $22 billion of expenditures for Vietnam on a $2.1 billion NIA deficit gives you an indication of where you might have been had it not been for Vietnam, and looking at those two figures, I think it is not too bad a performance.

Senator JORDAN. I am sorry; my time is up.
Chairman PROXMIRE. Mrs. Griffiths?

Representative GRIFFITHS. Thank you.

Mr. Schultze, I must say that having sat with you for the last 4 or 5 days in the committee, you must feel this is a cold and friendless world.

Mr. SCHULTZE. Not as long as you are on the other side.

Representative GRIFFITHS. I would like to ask you are you estimating for 1968 something more than a $2 billion deficit in the national income?

Mr. SCHULTZE. On a national income accounts basis it is $2.1 billion. Representative GRIFFITHS. Does this take into consideration a tax increase of about $5 billion?

Mr. SCHULTZE. On an NIA basis; that is correct.

Representative GRIFFITHS. What do you estimate the effect of a $5 billion tax increase upon employment will be?

Mr. SCHULTZE. Very roughly we would feel that with a $5 billion tax increase, and with all of the other things that are going on, both Government and private, as we can best estimate it, the unemployment rate should remain, with obviously some minor fluctuations from month to month, about where it is now.

If you didn't have the $5 billion tax increase but had everything else, then presumably the unemployment rate would fall. We believe that this at the same time would in this context lead to greater price rises. Representative GRIFFITHS. And what is the unemployment rate right now?

Mr. SCHULTZE. 3.8 percent.

Representative GRIFFITHS. I observed, I believe it was yesterday or the day before, and I think it was in Wisconsin, milk being poured down the drain because people weren't getting the prices they wished. If unemployment were increased, would you still press for a $5 billion tax increase?

Mr. SCHULTZE. Fairly obviously, Mrs. Griffiths, we hope we have the good sense to be flexible in the face of changing conditions, and I think we do have that good sense. At the present time, in our best estimates of what the economy requires, we think the $5 billion is needed. If circumstances were to change, we would have to reevaluate this, but at the present time we see no need to.

Representative GRIFFITHS. Does it not really depend upon employment rather than upon deficits?