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What is your second and third?

Mr. SCHULTZE. The second one is my view that the size of the strategic forces we are now planning to buy, particularly with respect to the MIRVs, is more than needed for assured destruction or to put it another way, would depend for its justification upon an exceedingly high estimate of Soviet capability.

Thirdly, it seems to me lurking in the background

Senator CASE. Excuse me, do you mean overkill?

Mr. SCHULTZE. Yes, it is something beyond what is needed for a really conservatively estimated assured destruction, even though it may get cranked into the assured destruction calculation.

Thirdly, and this I have to remain a little fuzzier about, I get the feeling really it is a belief; it is more than a feeling. One can read the colloquy in various hearings between Senators and the Joint Chiefs their view apparently that U.S. strategic power over and above what is needed for assured destruction somehow provides additional diplomatic maneuvering strength against the Soviet Union. Very often the Cuban missile crisis is cited as an example that we ought to have an excess of strategic power because in some vague general way this tends to give us greater bargaining power in all sorts of potential confrontations with the Soviets. I don't see it, but this is the argument.

Senator CASE. I understand what you are saying. I believe I have heard this expressed at very high levels of government. Where would we be in discussions about Berlin, if we should get involved, if we were not significantly stronger than the Soviet Union? What would other countries think of a United States that presumably was unable to destroy the Soviet Union after a first strike and didn't have a great preponderance of strategic power? That is what you are talking about? Mr. SCHULTZE. That is correct; yes, sir.

Senator CASE. And I suppose one phase of that could be said to be the stage of desirability of being able to bargain from strength at the SALT talks. That is related, if not in a family way?

Mr. SCHULTZE. That is correct.

Senator CASE. At least by analogy.

BUDGET BUREAU EXAMINATION OF U.S. PROGRAMS

Now to turn to the practical side of the matter you are advising us on, what was the size of your actual working staff at the Budget Bureau when you were head of it?

Mr. SCHULTZE. About 300 professionals of whom roughly somewhere between 150 and 200 were directly engaged in what we call examiner work, namely, examining particular programs; others were involved in management activity and other sorts of things.

Senator CASE. 150 to

Mr. SCHULTZE. 200.

Senator CASE. Actually analyzing programs presented to you by the various departments?

Mr. SCHULTZE. Correct; yes, sir.

Senator CASE. Of that number how many were regularly available for review of Defense Department recommendations?

Mr. SCHULTZE. My recollection, which I may have to correct for the

record, is something like 40. It could have been 38; it could have been 45, but it was in that ball park.

Senator CASE. And they were more or less continuously involved in this area, so they did acquire certain familiarity with the problems? Mr. SCHULTZE. Yes, sir.

Senator CASE. And I assume they possessed a continuity of understanding and judgment and knowledge about ongoing programs. Did you have anything to do with how programs worked out after they were put into operation? Was this part of your job?

Mr. SCHULTZE. On a selective basis, it was. With a $70 billion to $80 billion budget, a civilian payroll of a million men and armed forces of three and a half million men, obviously the amount of postprogram evaluation, the checking a group of 40 men can do, is obviously limited. Nevertheless, there was some of that; yes, sir.

Senator CASE. Mostly, I suppose, related to the bearing of these expenditures and operations of past programs on current and proposed programs?

Mr. SCHULTZE. Primarily, that is correct. Although, for example, such things as how well does the Air Force logistics system operate and could it be reformed to give you savings, this kind of thing we would look at occasionally.

ADEQUATE REVIEW OF U.S. PROGRAMS DOUBTED

Senator CASE. You know in a rough way about the resources available to Congress in its review of the military budget and all other budgets. I suppose the House Appropriations Committee in general is the one that is best staffed for this purpose. Our Appropriations Committee can't really pretend to go into such things de novo. In fact, the Senate's role in appropriations is often regarded as kind of a court of appeals, hardly ever cutting anything down, hardly ever questioning programs, but rather, whenever government agencies or outside interests feel they have been short-changed in the House, they come to the Senate Committee. This is primarily what our staffs are set up to handle.

What I am bringing out is that it seems to me neither in the executive branch, neither in the President's office, nor in Congress is there any organization adequate to do the job that needs to be done, not only with domestic but also with the Defense programs. Your report really doesn't go into that problem, which I know bothered you as it has all of us because it bears upon our own sense of personal inadequacy and frustration at not being able to do the job which we all agree needs to be done. How can adequate review of U.S. programs be accomplished?

HOW CAN ADEQUATE REVIEW OF U.S. PROGRAMS BE ACCOMPLISHED?

Have you got any suggestions for us about how this side of the job can be tackled? Is it better for Congress to avoid any effort at institutionalized review on an adequate basis of Defense spending or domestic spending? Had we better only reply on spot checks, an ad hoc operation such as we attempted last year in the Senate regarding the Defense bills and the ABM? Or should we try to institutionalize this task, adequately funding and structuring an organization to deal with

this problem in the way it should be done, realizing that if we don't no one else will?

Mr. SCHULTZE. Senator, I would first start by agreeing absolutely 100 percent with the basic thrust of your point. You know cynics to the contrary notwithstanding, knowledge is power, and while high quality staff resources don't guarantee right answers, they sure make it possible for people to exercise, Senators and Congressmen, to exercise judgment better.

Therefore, I would have three, perhaps a bit presumptuous, but in any event three suggestions. One is a very simple one. I have never been able to understand why the Congress has always been so chinchy on staff for itself, both in terms of its own personal staff and its committee staff. It seems to me this was fine in the 19th century. The world is far too complex and the program we are dealing with-you know, the Federal Government, as I said, disposes of 20 percent of the national income, $200 billion, and most of them dealing with the cutting edge of the things Americans are concerned about, and I don't care how dedicated people are, it is just terribly complex and needs substantial analysis and staff work and independent checks, because with all the best will in the world one of the things that is very important is having a number of independent checks of both the Executive on the Congress and the Congress on the Executive and this needs to be done with knowledge, not just with rhetoric.

Second, it seems to me, more specifically with respect to something like military spending, there are two elements of the military budget in a sense. One deals with the very specific weapons systems in the very specific force sort of things that need to be looked at, you know, the ABM from a technical standpoint, the F-111, the new Navy fighter plane, the F-14, do we need it and how much do we need it and so on.

Senator CASE. And carrier forces?

Mr. SCHULTZ. That is one aspect.

The second aspect, it seems to me, is the very broad policy aspect of what is the relationship between our foreign policy interests, as a Nation, and the broad military structure and strategy that we are pursuing because it doesn't make much sense just to argue about an F-14 if you have got a military structure which is completely out of kilter with what the Nation, on the other hand, appears to be doing with respect to its foreign policy commitments. I would, therefore, say we not only need more staff for the committees explicitly examining military budgets on a detailed basis, but second, some kind of new institution-I made this suggestion before some kind of a jointcommittee-type arrangement, which would explicitly be charged each year with a joint review of the broad foreign policy and military structure and how they relate to each other issuing annually a report. to the Congress commenting upon this.

It seems to me this doesn't in and of itself do anything except it begins to bring into the open some of the underlying assumptions and structures and it requires some analysis and hard thought and playing with alternatives.

I would suggest, therefore, in summary, more staff generally, clearly more staff and high quality staff for dealing with specific military appropriations and, thirdly, some sort of an institution

whereby the Congress would jointly look at the military-foreign policy complex and annually issue some sort of overriding report, simply informing the Congress and the Nation what its examination

has turned out.

COMMITTEE ROLE IN REVIEW OF U.S. PROGRAMS

Senator CASE. It seems to me this makes great sense and I am very much interested in pushing it forward. It is in the performance of this function that this committee has a real role to play, aside from the question of its jurisdictional correctness in getting into it. Mr. SCHULTZE. Correct.

Senator CASE. It is arguable that we shouldn't become involved with matters that the Armed Services or Appropriations Committees primarily are involved in, except that we have to because it bears upon this latter question: The relation of our power, military power, to our commitments and to the Nation's needs.

Mr. SCHULTZE. Presumably, you know, power should be the handmaiden of commitments and not the other way around.

Senator CASE. That is a fascinating philosophical proposition. I don't know that it is possible to answer it any more than we could ever find an answer to how many angels could dance on the point of a needle. But these issues are interrelated. I would like to thank you, as a member of this committee, for your appearance this morning and for your continued help in these most difficult matters.

Mr. SCHULTZE. Thank you, Senator.

PROJECTED U.S. ECONOMIC SITUATION

The CHAIRMAN. Mr. Schultze, you had some observations to make about growth. In your statement you say, "Economic growth would resume at a 4 to 42 percent annual rate after the present pause, with the unemployment rate returning to slightly below 4 percent sometime in 1972." With your projections on budgets, how do you project the state of the economy itself? This is what I meant when I mentioned the financial community's estimate of the present situation, not only in the market, which dropped yesterday to the lowest levels since the assassination of President Kennedy.

According to the New York Times yesterday, the interest rates are now going back up. It says―

Interest rates on several types of fixed-income securities-Federal agency notes, tax-exempt notes and bonds and corporate bonds-moved upward yesterday as the credit markets sought to get their bearings.

This is consistent with the estimate that the earnings of the great corporations, which account for a large percent of the Government's income, are headed downward. Is it not? This estimated $3 billion deficit could grow very large if the income goes down; couldn't it? Mr. SCHULTZE. Yes, sir.

The CHAIRMAN. The income is about as important as the expenditures in figuring out the deficit; isn't it?

Mr. SCHULTZE. Well, you know the one central thing I have assumed here is that quite apart from a forecast of the immediate future in the next 6 months to 9 months, that within some limits, the Federal Government can't and for fairly obvious political reasons

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will not allow the economy to continue for the next 3, 4, and 5 years with a very large unemployment rate and very low profits. That quite apart from how one projects the next year, if I look out to 1972, somewhere in there, as I say both for economic and political reasons we will be somewhat back toward normal growth even though we may end up with a lot more inflation in that period than we would like.

RISING U.S. INTEREST RATES

The CHAIRMAN. I will put the article by Mr. John Allen in the New York Times of April 29 in the record. If these interest rates continue to rise, that is a reversal. We thought interest rates were beginning to go down a week or two ago, but apparently they are going up.

(The information referred to follows.)

[From the New York Times, Apr. 29, 1970]

BOND RATES RISE FOR NEW ISSUES

TRADING IN CREDIT MARKETS CALM AS REFUNDING NEARS

(By John H. Allan)

Interest rates on several types of fixed-income securities-Federal agency notes, tax-exempt notes and bonds and corporate bonds-moved upward yesterday as the credit markets sought to get their bearings.

Prices of already outstanding bonds did not change much yesterday and trading activity was not particularly heavy. The Government securities market held steady as it waited to hear the terms-expected this afternoon-for refinancing $16,557,000,000 of notes that mature May 15.

In the new-issue market, these offerings illustrated the chief rate increases: The Federal National Mortgage Association priced $400-million of 28-month debentures to yield 8.40 percent, up from 7% percent in a similar sale a month ago.

The Tennessee Valley Authority sold $100-million of 119-day notes at an average rate of 7.77 per cent, up from 6.60 per cent in a similar sale in March.

Ohio sold $50-million of high-grade bonds that were priced to yield 5 or 10 basis points higher than Aa-rated tax-exempts sold a week ago. Investors snapped up all but $10.6-million of them by late afternoon.

Michigan, which was not expected to sell its $36-million bond issue because of a 6 per cent rate limit, received one bid. These bonds were given yields as much as 20 basis points more than Aa-rated tax-exempts last week. The new issue, too, sold briskly; the unsold balance at the end of the afternoon was $11.48-million. In the corporate bond market, the Pennsylvania Power Company sold $15million of Aa-rated 30-year bonds that were priced to yield 9.10 per cent, or 10 basis points more than the 9 per cent return on the similarly rated Virginia Electric and Power Company issue sold a week ago.

Unlike the larger Virginia Electric offering, the Pennsylvania Power issue did not sell out completely the first day. An estimated $5-million of the bonds still remained in the underwriters' hands late in the afternoon.

All these increases in interest rates took place as the credit markets ignored the news that a small California commercial bank had reduced its prime lending rate to 71⁄2 per cent from per cent. Six weeks ago, the bank-the Community National Bank of Bakersfield-was the second in the country to drop its basic loan rate to 8 per cent from 81⁄2 per cent.

In the $50-million Ohio bond sale, the state awarded its securities to an underwriting group co-managed by the First National City Bank, the Chase Manhattan Bank and the First National Bank of Chicago.

The CHAIRMAN. I believe the Government is selling Treasury bonds today. One reporter this morning said that it was estimated they would have to go to 814 percent. Wouldn't you consider it a rather

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