business, where it is deemed more advisable, either by the administration or the Congress, to do it in the form of an interest subsidy rather than the appropriation of the total amount. To do it you would have to set aside the $2 billion that you appropriated. It probably would have to be put in the fund. I do not know that you would gain a whole lot.

Mr. SHULTZ. I think there is an additional consideration. I recognize there are pros and cons in the use of this approach with respect to any particular item. When you use this approach you give an incentive, a little subsidy, in order to get something to happen essentially in the private sector of the economy as distinct from appropriating the money and operating it as a Government program.

You can argue that one approach may be better than the other or that there are circumstances where you would want to go one way and circumstances where you would want to go the other way. It can be used, but you must be careful for the reasons you suggested.

FINANCING COLLEGE FACILITIES

Mr. SMITH. In the case of college facilities, we were giving them a grant of about a third of the cost of the building and they raised a third from private sources and went in debt for a third. Now they raise about a third and we pay the interest on the debt for the rest of it. I do not think they are as well off and, in the long run, it costs us more money, and they must repay twice as much plus interest.

My purpose is not to argue about that, but to say that we are really reducing our discretion in future budgets. We have to pay these bills as they come in. We do not have discretion in future budgets as we pile billions upon billions for that kind of debt to be paid in installments.

Secretary CONNALLY. There is no question about it.

RURAL DEVELOPMENT

Mr. SMITH. My other question has to do with rural development. I would like to know if I understand your proposal on revenue-sharing as pertains, for example, to rural water and sewer programs. We appropriated $100 million a year ago, of which $44 million was used and $56 million held back. For that program, there is nothing in this budget. They got more money this year than last only because $56 million was held back.

If the States do not enact a program to take the place of this program, in 1973 there won't be any money in the pipeline. Under revenuesharing, where will people in Iowa get this help in 1973?

Mr. SHULTZ. Under revenue-sharing, you give a description of what you mean and what you are covering by an area, special revenuesharing for rural development in this case. The decision would be local option decisions made at the State or local level as the case may be.

Mr. SMITH. If the State does not use the money for that purpose, then they will not have any money for that purpose and they will have to come back to Congress in another act or else do without. That is all it amounts to, is it not?

Mr. SHULTZ. No. The States would not have discretion in that case of deciding not to use the money for anything to do with rural development. They would not be pinned to any specific use of the money.

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Mr. SMITH. They would not have to use it for a rural water or sewer program?

Mr. SHULTZ. No, sir.

Secretary CONNALLY. Putting it another way, if you had 10 programs combined under revenue sharing and you had a billion dollars allocated to 10 programs, the net of it is that you would have a billion dollars to be disbursed or to be programed at the State or local level, but it would not have to be put precisely $100 million, in each of those 10 programs. They could have some choice, some discretion, as to how the billion dollars would be spent, within what areas they would necessarily have to be spent within the confines of rural development as determined by this Congress.

DISTRIBUTION OF REVENUE-SHARING FUNDS

Mr. SMITH. In order to make an intelligent decision on whether or not to support revenue sharing, how am I going to explain to 140 people in some town in Iowa how to determine or calculate what their share of revenue sharing is to be?

Mr. SHULTZ. As far as general revenue sharing is concerned, we have a tabulation by State and units of general government which I believe has been distributed.

Mr. SMITH. I thought maybe you could give it to us a little easier. I have the formula here in the Treasury booklet. I do not think it is understandable though.

Secretary CONNALLY. You have in addition to that, sir, a printout of the computer tapes published by the Treasury Department, which was available, I believe, the day before yesterday. I am sure it is available in your office. It shows the counties and cities throughout the United States and the amount of money that each would receive in precise dollars under the general revenue-sharing program.

Mr. SMITH. This will change, will it not, as some counties spend more money and the poorer counties are not able to keep up with them and get less money?

Secretary CONNALLY. Not in the general revenue sharing. That is determined on a formula based first on a State's population times its tax effort. It is a formula that is carefully developed. That formula will obtain.

There is a pass-through of these moneys under the general revenue sharing. Across the Nation, 48 percent of the money, on the average, will be passed through to local units of government. These are units of government with general jurisdiction. They are not water districts or other special districts.

Mr. SMITH. School districts?

Secretary CONNALLY. No; the plan does not include that. It includes cities, counties, and townships.

Mr. SMITH. Where will the school districts come in? Most of our local taxes go for that purpose.

Secretary CONNALLY. Education will be one category of special revenue sharing, one of the six categories that the President and this administration recommend for the $11 billion. There will be no diminution of money with respect to education. All of the money that is now appropriated under the various programs will continue

under special revenue sharing and be distributed to the States and to the localities in the field of education.

It gives the State or city or county greater latitude in determining whether they will use that money for education to hire additional teachers, provide teaching aids, build classrooms or a gymnasium, or whatever. They are not tied so categorically as they are now under the present grants from the Congress.

CATEGORIES FOR SPECIAL REVENUE SHARING

Mr. FLYNT. I just wanted to ask for clarification. Several of us this morning had this question and did not ask it. What are the other 5 categories?

Secretary CONNALLY. The six categories are education, transportation, law enforcement, rural development, urban development, and manpower training.

Mr. MAHON. The gentleman from Wisconsin, Mr. Davis.

CONCEPT OF A BALANCED BUDGET OVER A PERIOD OF YEARS

Mr. DAVIS. Mr. Secretary, this is a rather general question. I think what we are trying to do is cut down the role of the management of this full employment budget concept. Once we give up the ideal of a balanced budget by year, it seems then that we almost have to get into the concept of balanced budget over a period of years or over a cycle. I would like, if I could, to get some indication that there is the concept of looking at this over a cycle: in terms we are not using the balanced budget as the ideal.

There have been many dropoffs from that ideal for a period of years. That leads us to the variable factor of taxation where it looks as if this concept destroys taxation as a means of revenue raising and substitutes for it the concept of taxation as a means or a tool for managing the economy. It appears that we start with the acceptable situation of tax revenues at their current level, and it would appear we then see two situations under which we would think in terms of tax increases. One of them would be if the actual spending influenced by Congress were to substantially exceed the amount in the original full employment budget submitted; and the other would be the opposite situation, where the economy became heated up to the point that we had a surplus, when taxation would then become a necessary tool to manage the economy and would thereby create an additional surplus in the hands of the Federal Government.

This gets to the whole idea of looking down the road at what we really are talking about in the full employment budget.

Mr. SHULTZ. I would not want to say there is built into this idea any automatic sense in which surpluses are going to balance deficits. Nevertheless, as we work along at the problem, there can very well beand I think we should expect there to be-years when we will have an actual surplus.

One might find that occurring for two different kinds of reasons. One would be the situation in fiscal year 1969, when we had an actual surplus which was the result of trying to have the budget help to a degree in cooling off an overheated economy. That is one situation in which you tend to have some surplus.

The second type of situation would be one where, with the economy operating at a high level, it is judged that we should have a full employment surplus, and the combination of monetary and fiscal policies can maintain the economy at a high level, with the actual surplus in effect releasing funds for the use of the private sector, particularly for things like construction and residential construction. That would have an effect on interest rates.

I think these are circumstances where we could see an actual surplus, although it would be less than proper to say there is built into this an automatic notion of budget balancing over, say, the business cycle.

FULL EMPLOYMENT BUDGET AS A GUIDELINE

Perhaps Chairman McCracken would want to comment on that. Mr. MCCRACKEN. Only to state again the comment that I made yesterday afternoon.

As I look at the concept of the full employment budget and ask what new element has been brought into the budget picture, at least in principle, it seems to me the new element is to try to bring back more explicitly into the picture the concept of fiscal discipline.

If we look back over the long period of years behind us, in the fact the Government has not tried to balance its budget in periods of slack business activity. In other words, the use or the pursuit of fiscal policy with a deficit under those circumstances has been, in fact, the practice and the fiscal policy.

The problem was that without any more explicit guides as to how far to go, we found on occasion, such as in the latter part of the sixties, that it was easy to make decisions that perhaps were helpful in stimulating the economy in the short run that left us with an almost intolerable problem for the longer run.

With this guideline to budget policy, it is possible to have some concept of how far to go in the interest of stimulating the economy in the short run before one is to start to court the risk of serious imbalances later on.

TAX POLICY IN THE FULL EMPLOYMENT BUDGET CONCEPT

Mr. DAVIS. Would you care to comment on where tax policies would fit into this concept of the full employment budget, Mr. Secretary?

Secretary CONNALLY. I have two comments to make.

First, lest the committee be frightened, I think we should point out at this point that there is an annual budget review, both by the administration and by this Congress.

Second, taxes are a tool, however undesirable. In a free society taxes should serve some useful purpose. I do not know anybody who would just impose them on themselves just for the sake of taxing. I think we have to view taxes both as a means of raising revenues to cover the necessary expenses of the operation of government; and under this full employment budget concept and even other economic concepts, taxes must also be used as a tool for assisting in either the expansion or the slowing down of the economy, to the extent that the fiscal policy of the Government can influence the economy.

Mr. DAVIS. Even then, in the situation I have referred to, where, once we had a surplus based upon the full employment budget which arose out of an overheated economy, we might use additional taxation to dampen the economy and thereby create an even more substantial surplus.

Secretary CONNALLY. That is entirely possible. Again, it would depend upon the circumstances and the judgment at the time. If you needed additional taxes to dampen a severe inflationary trend, I think it would certainly be justified.

Mr. SHULTZ. I suppose another way of putting the point, in addition, would be that, if the outlay discipline is maintained-let us hope it will be-and then the economy becomes overheated, that situation will automatically produce a surplus. Then you could still make the judgment that, given how overheated the economy is, it would be desirable to produce an even greater surplus, and that you would do by cutting back further on outlays or raising taxes.

Mr. MCCRACKEN. At the very minimum, the surplus then should not be interpreted as an invitation to lift the level of spending higher.

THE LONG-RANGE BUDGETARY OUTLOOK

Mr. MAHON. Mr. Secretary, in prior years there has not always been a disposition on the part of the administration or on the part of Congress to chart out a new program insofar as its cost implication for future years is concerned. Last year the Nixon administration did a little crystal balling. You talked about an overall 5-year look, which it seems to me was a very excellent idea. I want to commend you for pursuing this practice in the budget this year.

I would like to place in the record at this point your treatment of this matter as it begins on page 58 of the budget.

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