Note: Adapted from Charles L. Schultze with Edward K. Hamilton and Allen Schick, "Setting National Priorities: The 1971 Budget" (Brookings Institution, 1970), table 6-5, p. 186.

Revenues under existing tax laws would have risen from the current $202 billion estimated for 1971 to about $284 billion by 1975. However, the tax reform bill of 1969 provided for a host of tax cuts, scheduled to phase in over the next several years. By fiscal 1975 the net revenue loss from that bill will be $8 billion, leaving $276 billion in revenues for the Federal Government which, as you will see, is in the second column in that table.

A return to the pre-Vietnam military structure and pace of modernization would mean a defense budget of about $62 billion in today's prices and $74 billion in the prices likely to prevail in 1975. That $74 billion is almost exactly equal to the military budget projected for 1971, taking into account the pay raise that is coming up. (Rapidly rising numbers of retired military personnel will also add substantially to the budget over this period, a fact which has been taken into account in the estimates.) The projection, as I mentioned before, assumes a residual expenditure of $1 billion in Southeast Asia.

PROJECTED FUTURE BUDGETARY CONDITIONS

On the civilian side the built-in growth of current and Administration-proposed Federal programs would add some $50 billion to Federal outlays in the 4-year period between 1971 and 1975, a rise of about $1212 billion per year.

There will be, then, and this leads, by the way, to total Federal expenditures of $253 billion compared to total revenues, that leaves $23 billion as the residual, the gap between revenues and already committed expenditures.

But not all of this $23 billion will be freely available to pursue high priority domestic programs of the Federal Government or for tax reduction purposes. In 1968, the Congress after examining the data on the rate of new family formation and on the condition of the housing stock, set out as a goal for the Nation the construction of some 26 million housing units in the decade of the 1970's. The Nixon administration has adopted that goal, with some modifications. But

it is most unlikely that this goal of building 2.6 million housing units a year can be met unless the Federal Government, under conditions of high employment prosperity, runs a substantial budget surplus, which I have put conservatively at $10 billion per year. Under economic circumstances likely to exist during prosperity in the next 5 years, failure to run a budget surplus would generate such tight money and high-interest rates that housing construction would not reach the 2.6 million per year goal. On the basis of the projections in its latest economic report, President Nixon's Council of Economic Advisers appears to agree with this conclusion.

Granted the need for a budgetary surplus of this rough magnitude, then, the fiscal dividend available to meet high priority domestic needs by 1975 will total only $13 billion. If I can refresh your memory of that calculation, revenues would be $276 billion, expenditures to which we are already committed, including President Nixon's proposed new program, of $253 billion, leaving a difference of $23 billion, of which I am assuming $10 billion would have to go to a surplus in order to make that housing goal possible, leaving $13 billion available to expand existing programs beyond their built-in amount or to create new ones 4 years from now.

Let me note that this $13 billion is less than 1 percent of the gross national product projected for 1975, or to put it another way, although the Federal Government disposes of 20 percent of the national income, built-in commitments and the cost of the defense program assuming a return to the pre-Vietnam pattern, will absorb 19 percent of that, leaving only 1 percent freely disposable by the President and the Congress. This is hardly a large sum to look forward to, 4 years from now, and even after assuming that Vietnam hostilities are ended.

EFFECT OF ALTERNATIVE FOREIGN AND MILITARY POLICIES ON FISCAL

DIVIDEND

Let me now look at some alternative foreign and military policies and their possible effect on this fiscal dividend.

I pointed out earlier that the projections I have given you assumed a continuation of current strategic nuclear force policies and a return to the pre-Vietnam force structure for the Nation's conventional forces. This would imply a military budget of $62 billion in fiscal 1971 prices and $74 billion in prices expected to prevail 4 years from now in fiscal 1975.

The $62 billion which I remind you excludes the costs of Vietnam, may be conveniently split into two parts:

Strategic nuclear forces--

Conventional forces__-

Total

$18, 000, 000, 000

44, 000, 000, 000

62, 000, 000, 000

Let us examine each in turn starting with conventional forces.

CONVENTIONAL FORCES UNDER ALTERNATIVE POLICIES

The pre-Vietnam baseline force which would be bought by $44 billion would consist of the following major elements: 2.7 million men in the Armed Forces; 192% active divisions and seven higher priority

reserve divisions; 23 tactical air wings; 15 naval attack carrier task forces; substantial forces for antisubmarine warfare, airlift and sealift, and amphibious warfare; and continued large outlays for communications intelligence, and research and development. Such a budget would also provide substantial sums to keep the weapons and equipment of this force modernized.

This force structure was basically designed to provide the capability simultaneously to fight the initial premobilization stages of two large and one small war: a Warsaw Pact attack on NATO; a Chinese conventional attack in Southeast Asia or Korea; and a minor conflict in the Western Hemisphere.

One alternative to returning to this type of force structure is to adapt the Armed Forces and the military budget to a literal interpretation of "Guam doctrine." If we truly accept the fact that the United States is no longer prepared to intervene on the ground in a large way in Asia, then those forces in the baseline structure earmarked for that contingency could be sharply reduced. Should we adopt a military posture consistent with this change in our overseas policy, some $10 billion per year could be saved in the military budget.

We could eliminate: six Army divisions, three wings of tactical aircraft, six attack carrier task forces, and a significant part of our antisubmarine and amphibious forces in the Pacific. Such a reduction would still leave the United States with two Marine divisions, six fighter bomber air wings, and three attack carriers earmarked for service in an Asian emergency. In addition, a reasonable reevaluation of how we deploy our carriers might release one or two of the Atlanticbased carriers for Pacific service. In short, a military force structure consistent with the apparent foreign policy thrust of the Guam doctrine could release $10 billion a year of additional resources in higher needed resources for meeting domestic purposes.

I am fully aware, of course, that many in the military will argue that even if we do reduce our overseas commitments, we cannot afford to reduce our Armed Forces since they will be needed to back up more fully than they do now the remaining commitments. The Navy will argue, for example, that if we give up bases in Asia we need carriers even more than ever before. As a matter of fact, however, the existing number of carriers has never been fully justified; the use of carriers in a "surge" role to provide quick initial air cover prior to the establishment of Air Force bases rather than in continual support as is now the case, would itself greatly reduce the need for the current number of carriers; and there is no shortage of potential airfields in relevant parts of the world which can be made usable quickly for Air Force fighters by employing "bare base kits" stored by the Air Force.

More generally, the mere adoption of a change in long-range foreign policy commitments, such as that presumably contained in the Guam doctrine, will not be automatically accompanied by a matching change in the military force structure. But changes in the two should certainly go together. And if the Guam doctrine can be made to lead to a consistent reassessment of military requirements, some $10 billion in budgetary savings per year might be realized.

STRATEGIC NUCLEAR FORCES UNDER ALTERNATIVE POLICIES

Let me turn to the strategic nuclear forces.

Taking into account their share of budgetary costs for intelligence, communications, R. & D. (research and development), and the like, the maintenance and improvement of the Nation's strategic nuclear forces currently takes about $18 billion in budgetary resources annually. Current strategic doctrine is apparently in something of a transition period and future trends will obviously be affected by the outcome of the SALT (Strategic Arms Limitation Talks) talks. Nevertheless, present strategic force objectives may be described if a bit clumsily as: the maintenance of a generously estimated assured destruction capability, plus.

Assured destruction capability refers to our ability to absorb a Soviet first strike and retaliate devastatingly. This provides deterrence against a possible first strike by the Soviets. The term "generously estimated" in my description of current policy simply means that we are preparing against a very high estimate of Soviet capabilities, and buying "insurance" against all sorts of relatively remote contingencies. We are, for example, building our ABM (anti-ballistic missile) to protect our land-based missile sites against the contingency that they become vulnerable to Soviet SS-9's, even though our Polaris and Poseidon submarines are invulnerable to a Soviet strike and could do the assured destruction mission alone. The term "plus" was used in my description of current policy to cover the fact that with an ABM area wide defense against a possible Chinese missile threat we will be going beyond the assured destruction concept to try to provide some means of limiting damage from an enemy strike. The term "plus" also expresses my belief that the full introduction of MIRV's (multiple independently targetable reentry vehicles) into the forces as currently planned will push their capabilities beyond what even a most generous estimate of assured destruction capability would require.

The $18 billion cost of strategic nuclear forces, used in the initial projections for 1975, would provide funds for the procurement and deployment of at least some of the following new weapons systems: The ABM, phase I and II.

MIRV's installed on both land-based and submarine-based missiles. A new advanced manned strategic aircraft (AMSA or the B-1). A new airborne warning and control system, probably with a modified F-106 interceptor (AWA CS-F-106X).

A new underwater long range missile system (ULMS) to carry much heavier and longer range missiles than today's Polaris and Poseidon, the so-called ULMS.

An alternative strategic nuclear posture would accept assured destruction capability as a necessary and vital objective, but would not seek to build insurance on top of insurance and would give up the attempt to go beyond assured destruction. The alternative posture would start from the proposition that damage limiting capibilities are not useful as diplomatic or military instruments, that large-scale damage limiting capabilities are impossible to achieve against the Soviet Union and too uncertain and not worth their very large costs against

the Chinese. It would also reject going beyond the assured destruction concept as self-defeating in the sense of provoking Soviet counteractions which nullify the initial gain.

Under this alternative, deployment of the ABM would be deferred (while continuing research), MIRV deployment would go ahead but on a stretched-out and reduced basis, AMSA and ULMS would be carried on as modest R. & D. programs and the current air defense system would gradually be eliminated or cut back substantially. The $18 billion annual cost of the the strategic forces would be cut to $14 billion per year. The U.S.-assured destruction capability would consist of, a conservative estimate, 3,000 to 4,000 deliverable warheads carried on 1,054 perhaps vulnerable land-based missiles, 656 submarine-based missiles, some of which were MIRV's, and a force of 300 B-52 bombers. Against this number, it has been calculated that only 400 warheads would have to be detonated over the Soviet Union to eliminate it as an industrial society.

The force levels and capability provided by this alternative would. of course, have to be continually reviewed in the light of international developments and particularly Soviet strength. While it would reflect the belief that a restrained posture is most likely to lead to progress on arms limitations, it would not preclude later review and policy changes.

SAVINGS UNDER ALTERNATIVE CONVENTIONAL AND NUCLEAR POLICIES

If both of the alternative postures described above were adopted— a Guam doctrine-oriented structure for our conventional forces and an assured destruction strategic force-some $14 billion, $10 billion on the Guam doctrine-oriented structure, $4 billion on the lower one, some $14 billion could be eliminated from the defense budget. These savings are measured in dollars of today's purchasing power. By fiscal 1975, in prices projected for that period, the savings would be $17 billion. In that situation the 1975 defense budget would be not $75 billion I projected earlier, but $58 billion. The fiscal dividend available for meeting other needs would rise from $13 billion to $30 billion, an increase of 150 percent.

In my own view, while the specific dollar sums and the detailed force structures incorporated in the lower cost alternatives I have presented are obviously open to question and debate, neither represents an extreme suggestion, nor can it be characterized in the invidious. sense of the term as "unilateral disarmament."

The lower cost alternatives would provide the United States with awesome strength, both strategic and conventional, a strength not inconsistent with its status and commitments.

ALTERNATIVES WHICH MIGHT INCREASE MILITARY COSTS

Let me very briefly look at the other side of the scale, some alternatives that might increase military costs.

There are, of course, potential developments which could raise the military budget above the level assumed in the central projections and thereby reduce or even eliminate the $13 billion fiscal dividend I originally projected.

First, continued U.S. troop presence in Vietnam. Should it occur that a residual number of U.S. troops are left in Vietnam indefinitely,