The CHAIRMAN. There are people who are inclined to say, "Well, the labor unions are responsible for all these increases." It is true, as some have alleged, in some instances they perhaps take advantage of it and go beyond what would be reasonable. On the other hand, the inflation itself is a cause, and a legitimate cause, for revision of the pay rate, the same as interest rates. It would not be different in that respect.

EFFECT OF VIETNAM WAR ON U.S. ECONOMY

I will put in the record an article in the Saturday Review by Mr. Murray J. Weidenbaum, who is now Assistant Secretary of the Treasury, where he stated:

More basic than all this [the economic problems caused by the war], the public's confidence in the ability to "fine tune" domestic economic stabilization policies has been undermined. The basic information and analysis released by the Federal Government to justify its policies has created more suspicion than trust.

It is a very interesting article entitled "Our Vietnamized Economy,” which is quite consistent with your own statement.

(The article follows.)

[From the Saturday Review, May 24, 1969]

AFTER VIETNAM: OUR VIETNAMIZED ECONOMY

(By Murray L. Weidenbaum)

Although American troops have been stationed in South Vietnam since 1954, the major buildup occurred between the middle of 1965 and the middle of 1967. This substantial and rapid expansion in U.S. military spending from $50 billion before the buildup to $80 billion now-has had many important effects. Fundamentally, it has altered the allocation of the nation's resources between the private and the public sectors. At the end of 1964, 20 per cent of the Gross National Product was purchased by government agencies and the remaining 80 per cent was available to the private economy. By early 1968, the government portion had risen to 27 per cent and the private share had fallen to 73 per cent. The Johnson Administration consistently underestimated military expendi tures, particularly during the crucial buildup period in late 1965 and much of 1966. Most economists and government administrators, moreover, failed to appreciate how quickly the military buildup was influencing the national economy-that the economic impact was occurring as soon as the defense orders were placed and, thus, substantially before the work was completed, paid for, and showing up in the federal budget. Furthermore, policy measures to offset inflationary pressures were not taken soon enough or in a substantial enough way. The January 1966 budget message of the President maintained that the United States could afford simultaneously to wage a two-front war without raising taxes: the domestic war against poverty and the war in Vietnam.

But the program choices made were not as simple as the classroom dichotomy of "guns vs. butter." In a sense, we chose both more guns (military spending) and more butter (more consumer purchases). However, we also chose-in part as tight money began to affect specific parts of the private economy-less housing and fewer automobiles. Simultaneously, the nation was voting for more social welfare programs-thus increasing both the military and the civilian portions of the public sector. As a result, 1966 witnessed what was then the most rapid period of price inflation since the Korean War.

Several major economic problems face the United States as a legacy of 1965–66. With the collapse of the stable price and cost situation prevailing prior to Vietnam, inflation is a major concern. Unusually high interest rates have been set in a thus far unsuccessful attempt to contain the inflation. Income taxes have been raised to reduce unprecedentedly large budget deficits ($25 billion in fiscal 1968). Despite forecasts to the contrary, a serious balance-of-payments situation continues. More basic than all this, the public's confidence in the ability to "fine tune”

domestic economic stabilization policies has been undermined. The basic information and analysis released by the federal government to justify its policies has created more suspicion than trust.

There also have been, of course, positive impacts of governmental economic policy during the war. A fundamental imperative was successfully achieved; a large and rapid shift of resources from civilian uses or idleness to military programs was accomplished. At the same time-unlike either the World War II or Korean experiences-the nation managed to avoid direct controls over prices, wages, and materials generally (although relatively small amounts of copper and a few other metals were set aside for use by defense contractors).

Despite the increases in defense spending and the accompanying inflation, economic growth and real improvements in the living standard of the average American continued. Even after allowing for inflation, the average American has experienced a real growth in income, from $2,123 in 1964 to $2,473 in 1968. Also, expenditures for civilian government programs actually have increased by a larger amount than did the military budget-simultaneously with the $30billion rise in defense spending due to the Vietnam war, civilian agencies of the Government have increased their expenditures by $35 billion since the war began. The shift from cold to hot war not only has raised the size of the military

16

53.6

1964

All other

federal expenditures.

81.0

76.0

1969

145.0

1974*

*Projected, fiscal 1974, with no 10% surcharge, no wartimo expenditures.
Source: Research Institute of America.

budget, but also has changed its composition drastically. The fundamental change was the shift of emphasis from maintaining the potential capability to deal with world-wide or general war situations, in favor of moving toward a military establishment actually waging a difficult but limited war whose dimensions kept evolving.

Three specific shifts in military requirements took place. The amount of funds going for tanks, artillery, rifles, ammunition, and similar conventional battlefield hardware more than doubled from the prewar level. The relative-as well as absolute-importance of missiles was reduced drastically. Meanwhile, the military aircraft budget was reoriented from new long-range bombers to acquiring smaller "tactical" aircraft, particularly helicopters and supersonic fighters, such as the F-4 Phantom.

Once again, the traditional manufacturing industries-automobiles, mechanical equipment, textiles, clothing, tires have become important suppliers of war material. The most dramatic increases have occurred in ammunition (orders have quadrupled since 1965), artillery and small arms (more than doubled), clothing and textiles (doubled), tanks and vehicles (up 68 per cent), and food (up 66 percent).

The highly specialized, science-oriented aerospace and electronics firms, although still very significant defense contractors, have found their shares of defense business declining. The ten firms with the largest amount of defense contracts in fiscal 1968-General Dynamics, Lockheed, General Electric, United Aircraft, McDonnell-Douglas, AT&T, Boeing, Ling-Temco-Vought, North American Rockwell, and General Motors-received 29.9 per cent of the total awards. This was down from their pre-Vietnam share of 32.2 per cent. It is interesting to note that nine of these ten giants of the military market are aerospace and electronics firms.

Unlike the period of production of large weapon systems-such as ICBMs, which could be supplied only by a few of the industrial behemoths with especially sophisticated capabilities the economic demands of Vietnam involve numerous smaller contracts with a variety of medium-sized firms. "Small" firms increased their share of defense contracts from 15.8 per cent in fiscal 1963 to 18.4 per cent in 1968. (Companies that made the Pentagon's list of the top 100 contractors in 1968, but were not in that roster earlier, include Atlas Chemical, Colt Industries, Lykes, McLean Industries, Automatic Sprinkler, Harris-Intertype, and National Presto Industries.) But many branches of the industrial economy—including leather, paint, plastic, paper, and furniture companies have experienced virtually no increase in defense work in recent years.

Large proportions of the companies working on Vietnam orders are in the upper Midwest and in other relatively older industrial states in the East, all of which have long-standing positions in the industrial and consumer markets. The Far West, which since the Korean War had been receiving a dominant share of defense orders, has experienced absolute as well as relative declines as a military supplier. For example, Washington state firms (mainly Boeing) received $530-million worth of defense contracts in 1968, compared to twice that amount in 1964 ($1.1 billion). Colorado's $263 million of Pentagon orders in 1968 were down substantially from the $390-million level of 1964, reflecting a decline in missile work by the Denver Division of Martin-Marietta. Similarly, in 1964 Utah received $340 million in military contracts, down to $263 million in 1968, reflecting lower levels of work on the Minuteman ICBM.

Eight states received defense contracts in 1968 at rates at least twice as high as the pre-Vietnam levels. They are Tennessee, Texas, Connecticut, Illinois, Alabama, Mississippi, Minnesota, and Wisconsin. Six other states were awarded defense contracts at least 50 per cent greater than in fiscal 1965, before the military buildup in Southeast Asia-Florida, Indiana, Louisiana, New York, Ohio, and Pennsylvania. Most of these states, such as those in the upper Midwest, are major producers of Army ordnance and other battlefields hardware. The most dramatic expansions have been among helicopter manufacturers, notably Bell Aircraft in the Dallas-Fort Worth area, Sikorsky Division of United Aircraft in the Hartford region, and Boeing-Vertol near Philadelphia. A special case of expanding effort is the TFX (F-111) supersonic aircraft being built by General Dynamics in Fort Worth.

Vietnam also has had important effects on the pattern of civilian employment. Overall, out of more than one million new jobs directly generated by the Vietnam war, the great majority has been in highly skilled and highly paid occupations-238,000 more professional and managerial employees vs. 30,000

more service workers (the latter being among the lowest-paid groups in the nation's labor force). While the war effort has resulted in 245,000 more skilled factory workers being hired, there have been only 65,000 more jobs for laborers, 178,000 more office jobs, and 29,000 more sales positions. Thus, indirectly, the war effort has intensified some of our domestic problems-by increasing jobs for the highly skilled and relatively highly paid, rather than for the lower-income, lower-skilled portions of the population. Only one out of every ten defense jobs bears a laborer's classification, while 22 per cent of civilian jobs do.

Early optimistic appraisals of the economic environment following peace in Vietnam have glowed with visions of tax reduction, negative income taxes, federal tax sharing with the states, and massive increases in nondefense governmental activities. However, decisions already being made are strongly shaping the nature of economic adjustments to peace. A return to the prewar dollar "base" of military spending no longer seems feasible.

One reason for this is inflation. Prices on military procurements, and wages and salaries for the armed forces and cilivian employees, have increased. Under existing law, the pay of both military and civilian employees of the Pentagon is scheduled to rise by about $2 billion in mid-1969. Several large weapon systems are in early production stages and the large expenditures will come in the next year or so. They include several nuclear carriers and destroyers (about $4 to 5 billion), the Poseidon and Minuteman III missiles (about $7 billion), and the Safeguard ABM system (estimated from $5 billion to several times that amount).

Moreover, because the non-Vietnam portions of the military budget have been squeezed in recent years, considerable "catching up" is needed especially in deferred maintenance, inventory replenishment, and advanced research and development. In 1968, for example, the Department of Defense spent less money than in 1965 on research and development in army ordnance and combat vehicles (tanks, artillery, etc.) and in military science.

This is all aside from future consequences of any new decisions to bolster the nation's long-term arsenal of weapon systems. Two portents of future Congressional action are recent reports by the influential House and Senate Committees on Armed Services. After a year of detailed study and hearings on strategic forces those designed for all-out nuclear warfare-the Senate Committee urged "Prompt decisions should be forthcoming for the deployment of additional and more modern weapon systems and improvements to existing weapon systems." The Committee specifically recommended rapid development of a new long-range strategic bomber, and accelerated research and development on an advanced ICBM-each of which could cost $5 billion or more to develop and produce in quantity.

The House Armed Services Committee issued a similar report on seapower, again recommending new hardware. The committee chairman described as "irrefutable" the conclusion that the Navy's most urgent requirement is new ships (nuclear escort ships currently cost about $125 million each, and nuclear carriers more than $500 million).

In addition, a large civilian space program is being recommended for the 1970's. Simultaneous development of a permanent space station plus continued exploration of the moon-after this year's scheduled manned landing-carries a price tag of $45 billion for the next decade. And development of a commercial supersonic transport, if carried out, will cost more than $1 billion. Over the whole economic structure, meanwhile, hangs the threat of inflationary pressures-which, as of this spring, were substantial.

Hence, because of these built-in momentums, the economic environment is not conducive to easy selection of new or expanded domestic social programs, regardless of urgency. Rather, economic factors tend to indicate the need for hard choices among the many pressures for government spending. A tough-minded sense of priorities and a careful weighing of benefits against costs are very much needed. U.S. GOVERNMENT'S FISCAL AND MONETARY POLICIES DURING VIETNAM

BUILDUP

The CHAIRMAN. There is one question I do not believe you answered. Would you comment about how you think the Federal Government has handled the fiscal and monetary matter during the time of the buildup in Vietnam in view of what has happened? Would you say they should have followed different policies 4 or 5 years ago?

Mr. LUNDBORG. Yes.

The CHAIRMAN. In what respect?

Mr. LUNDBORG. Well, we can spend another entire morning talking about this. I think that there is much too much reliance on monetary policy, not nearly enough use of fiscal policy early enough, not enough at all, and even what we have done, we have not done early enough, so that too much of the burden of trying to keep the economy in balance has rested on strictly monetary devices and not on fiscal, and this has been part of what has led to the distortion of the economy.

EFFECT ON BUSINESS OF PROSPECTS FOR ENDING VIETNAM WAR

The CHAIRMAN. What, in your view, are the expectations of the average businessman about when the war might end? Do you have any view about that?

Mr. LUNDBORG. I do not suppose businessmen are any different from anyone else in the population. They are all hoping it will be soon; they are bewildered and confused, as I said before, about when and how.

The CHAIRMAN. I have noticed in the paper that the pessimism over the prospects for ending the war are an element in the very weak situation in the stock market today.

Do you think it is an element in how people look at the stock market? To put it another way, do you think that when there are rumors that there may be some progress toward peace the stock market usually goes up?

Mr. LUNDBORG. First of all, Senator, I should probably make it clear I do not pose as an expert on the stock market, and my own record supports that.

But, in general, the stock market is downward-any downward movement in the stock market, any bearish tendencies are a reflection of uncertainty; and any bullish movement is a reflection of hope and certainty.

The CHAIRMAN. Confidence, would you say?

Mr. LUNDBORG. So that uncertainty certainly in the market, as in other things, would have a tendency to depress the market.

The CHAIRMAN. I want to put in the record here from this week's Time magazine an article on this very point, which is to the effect that many of the business leaders are pessimistic about the war's ending. Maybe it is better to just leave it at that.

(The article follows.)

[From Time magazine, Apr. 20, 1970]

BEARISH BOSSES

Among business decision makers, optimism about the future of the economy is at its lowest level in years. That gloomy statistic comes from a survey of "executive confidence" by the marketing firm of Sindlinger & Co. In a three-week period ending early in April, a nationwide sample of 230 owners and managers was queried. Only 50.9% of them thought that business conditions, employment and their own incomes would not be worse six months from now. This was the smallest percentage since July 1960, just after the last recession began. In January 1969, when President Nixon was inaugurated, the confidence level stood at 87.9%. It has been dropping fairly steadily ever since.

The company also takes a poll of consumer confidence. For the first time, says President Albert E. Sindlinger, that survey shows marked regional variations. Confidence is still high in rural areas and the South, but it is low where defense, construction and consumer durable-goods industries are based. "Up until March