1962 the average profits after taxes per dollar of sales for the 10 firms was below the comparable national average for all manufacturing industries or durable goods industries. When I checked the 25 largest firms their profit after taxes per dollar of sales figure was also below the national average.

I realize, as I said before, that these figures are inadequate to prove any case conclusively. They do, however, cast serious doubt on the extravagant claims we have heard about war profiteering.

ESCALATION OF VIETNAM WAR HAS DISTORTED AMERICAN ECONOMY

We do have more than adequate data to demonstrate that the escalation of the war in Vietnam has seriously distorted the American economy, has inflamed inflationary pressures, has drained resources that are desperately needed to overcome serious domestic problems confronting our country, and has dampened the rate of growth in profits on both a before and after tax basis. In the middle of 1964 when the Vietnam escalation began, the economy was in quite good shape. We had at that time an uninterrupted economic advance of 52 months a peacetime record. Unemployment averaged 42 percent; the consumer price index had increased only 1.2 percent during the first 6 months of 1965; and the average operating rate of industrial capacity was at 90 percent. There had been considerable success in maintaining Federal expenditures for goods and services below 11 percent of GNP from 1960 through mid-1965. In fact, the Government had even been able to change the composition of its spending by deliberately shifting emphasis from defense to nondefense spending.

The expenditures related to the Vietnam war, added to the near full employment economy that existed in mid-1965, generated severe inflationary pressures. Consumer prices began increasing rapidly as the Federal deficit grew. While there is room for a wide range of opinion covering proper tax policies during this period, especially over the timing and magnitude of tax increases, and the proper role of monetary policy, the basic cause of the inflationary forces was a sharp increase in Federal spending associated with the escalation of the conflict in Vietnam.

(The following information was supplied for the record.)

MAJOR CATEGORIES OF GOVERNMENT EXPENDITURES AS A PERCENT OF GNP, 1958-69

Source: "Economic Report of the President, 1970," and "Survey of Current Business."

The inflation, the growth in inflationary psychology, and the very stringent antiinflationary monetary policies have combined to produce serious distortions in the U.S. financial markets and resulting distortion in the economy. These distortions include the sharp drop in residential construction and the sharp growth in investment spending.

COMPARATIVE CORPORATE PROFITS BEFORE AND DURING ESCALATION

The facts clearly show that the Vietnam war has not been good for business profits. During the 4 years prior to the escalation of the conflict in Vietnam, corporate profits after taxes rose 71 percent. From 1966 through 1969 corporate profits after taxes rose only 9.2 percent. The CHAIRMAN. Is that the gross amount percentage? Does 9.2 percent relate to all corporate profits in the United States?

Mr. LUNDBORG. The gross profits of corporations reported. Am I correct in that, Dr. Ross?

The CHAIRMAN. Is the 9 percent from the whole period of 1966 through 1969 ?

Mr. Ross. Yes.

Mr. LUNDBORG. Yes.

The CHAIRMAN. It is only at the rate of about

Mr. Ross. Yes, sir, we have tables which we will be glad to add to the testimony.

The CHAIRMAN. I wish you would. I am not quite sure how to interpret that figure.

Mr. LUNDBORG. We will be glad to provide the statistics. (The information follows:)

The CHAIRMAN. It rose only 9.2 percent, not for the year, but for the 3-year period?

Mr. LUNDBORG. For the entire period.

The CHAIRMAN. That is practically nothing.

Mr. LUNDBORG. It dropped down to 2, slightly less than 2 percent. The CHAIRMAN. I didn't realize it was that drastic a drop. Senator CASE. You are comparing two 4-year periods?

Mr. LUNDBORG. Yes, sir; that is correct.

The CHAIRMAN. I see. Proceed.

Mr. LUNDBORG. You see we actually had 1 negative year of 5-percent drop in the after tax profits from 1966 to 1967, and so combining the 4 years, 1966, 1967, 1968 and 1969, it totals out to, believe it or not, cumulatively only 9.2 percent increase for the period.

The CHAIRMAN Yes.

Mr. LUNDBORG. Now, to avoid any thought that the recent tax increase may have fudged the figures, I also have similar corporate profit figures on a before tax and inventory adjustment basis. These figures show corporate profits rose 51.3 percent from 1962 through 1965 but the gains in profits were dampened to a 16.6-percent increase during the postescalation 1966-69 period. I might note, too, that all of this is in current dollars. If this had been adjusted to so-called real dollars the comparison would have been even sharper.

It should be clear from these figures that what is good for the economy is good for business.

IMPACT OF VIETNAM WAR ON U.S. BALANCE OF PAYMENTS

Most of the concern about the upward pressures on prices and costs originating in expenditures associated with the Vietnam war arises from recognition of the damaging effects of inflation on the domestic economy. This should not lead us to neglect the important impact on our position in international markets and the balance of payments. This is not to lay the blame for our balance-of-payments problems entirely on the recent period of inflation or on the Vietnam war. Inflation and the war-associated expenditures, however, have made the problem more intractable and solutions more difficult. These difficulties with our balance of payments have postponed indefinitely any relaxation of the restraints and controls under which international business has been forced to operate for the past several years in particular.

It is important, therefore, to comment briefly on what has happened to the U.S. balance of payments in the past few years, specifically with reference to the impact of the Vietnam war. Perhaps the first point that should be made is that the official measures of the balance of payments deficit have been misleading. The view, for example, that the balance of payments in 1968 was satisfactory because there was a surplus of $168 million and that the balance of payments in 1969 was very unsatisfactory because the deficit exceeded $7 billion is unacceptable. In fact, the greatest deterioration in the payments position in recent years occurred in 1968. The difference between the 2 years may be accounted for largely by massive flows of foreign funds in opposite directions which had very little to do with the basic balance of payments position.

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The best measure of what happened to the longrun position is the balance on current account, that is goods and services plus private remittances and payments of U.S. Government pensions. This balance declined from a surplus of $7.8 billion in 1964 to about $4 billion in 1967, and $1.4 billion in 1968, and less than $1 billion in 1969.

A good part of the progressive deterioration in this position over the years since 1964, the year before the major acceleration of the Vietnam war, may be accounted for by the large increase in foreign exchange outflows associated with military expenditures. These rose from less than $3 billion in 1964 to nearly $5 billion in 1969. This, however, is not the only measure of the impact of the war and the subsequent inflation on the balance of payments. The more important impact and the one which is likely to have the most long-lasting effects is on our competitive position in international and domestic markets, reflected in the rapid rise in the rate of importing of goods and services. In 1964 merchandise exports exceeded merchandise imports by nearly $7 billion. By 1968 this excess of exports over imports had declined to less than half a billion dollars. With moderation in the rate of inflation and inflation-induced expenditures, our trade balance may be expected to improve this year and in subsequent years.

It is too early to tell, however, what permanent damage to our international competitive position the recent period of inflation has induced. It generally takes several years, perhaps 4 or 5, before the full effects of excessive increases in price and costs show up in the competitive position, and the effects are not confined to world markets where our products compete with those of other Nations, but also in the United States where foreign products compete directly with U.S. products.

DOMESTIC EFFECTS OF VIETNAM WAR

So much for balance of payments considerations. Let us return to the domestic scene.

I do not think there is any doubt that the resources used toward the Vietnam war effort could have been put to work toward solving imperative problems facing this Nation at home. In the 5-year period prior to the Vietnam escalation, defense spending in the United States averaged $50 billion per year. If we assume that this level would have been maintained over the most recent 5-year period in the absence of escalation, the increase in actual spending totaled $118 billion. I was told this morning that figure could be corrected to $120 billion, but this will be close enough for this purpose.

During the past 4 years, total spending for residential construction in the United States totaled only $112 billion.

When we survey the very real needs in our economy in the areas of housing, urban transit, environmental pollution, et cetera, it is clearly evident that we do not need to create war-related demand for resources in order to maintain full employment. Our problem now is one of establishing meaningful priorities to meet the quality of life demands of our citizenry. We obviously cannot do everything at once; we need to start strategic planning and action now if we hope to resolve these demands.