about 7.7 percent. What do you estimate real GNP growth to be, and how does it go by quarters of the year?

Mr. MCCRACKEN. Our estimate of real growth in GNP for calendar year 1970 is 1.2 percent. We have not specified a precise quarterly pattern but we expect little change in the first half and a resumption of growth in the second.

PRICE INCREASES

Mr. MAHON. What were the price increases in calendar 1969 over calendar 1968-both retail and wholesale on the average? and during the year?

Mr. MCCRACKEN. We will be happy to supply that for the record. (The information follows:)

CEA ASSUMPTION FOR CALENDAR 1970

Mr. MAHON. What are the assumptions for calendar 1970 ? Mr. MCCRACKEN. The major assumptions underlying the CEA's projection for 1970 are that the President's budget for fiscal year 1971 will be approved by the Congress and that the Federal Reserve will make momentary policy less restrictive than it was in 1969.

HOMEBUILDING AND INTEREST RATES

Mr. MAHON. On page 4 of your statement you refer to interest rates remaining high, and housing expenditures continuing down.

Can you expand on that somewhat? It is such an important factor. Mr. MCCRACKEN. Homebuilding in 1969 and so far in 1970 has been adversely affected by high interest rates and disrupted capital markets. Lenders have turned away from home mortgages, where interest rate ceilings are fixed by law in many States, toward more profitable investments. Also, savers have shifted funds out of thrift institutions, where maximum rates are fixed by law, and have instead purchased securities, yields on which have exceeded rates of return obtainable from the institutions. Because of the outflow of savings, thrift institutions have found it increasingly difficult to make loans to homebuilders.

These conditions are likely to persist at least over the next several months, as a result of which homebuilding activity and expenditures are likely to continue downward.

RISE IN STATE AND LOCAL GOVERNMENT SPENDING

Mr. MAHON. Generally speaking, what is the extent of the rise in State and local government spending?

Mr. MCCRACKEN. We would be happy to supply that for the record, Mr. Chairman.

FISCAL POLICY AND THE MONEY SUPPLY

Mr. MAHON. Doctor, tell us something about the rate of growth of the money supply in recent years, and relate it in a general way to tax and spending policies in the effort to chart the right economic course to avoid the fiscal shoals.

Mr. MCCRACKEN. Fiscal policy and monetary policy have not always been well coordinated as the experience of 1968 demonstrated. At the end of June 1968, Congress passed the Revenue and Expenditure Control Act of 1968 for the purpose of restraining an overheated economy. The money supply-currency and demand deposits continued to grow at a very rapid rate and for the year as a whole expanded by 7.2 percent. This expansive monetary policy worked at cross purposes with the new fiscal measures and contributed to the prolongation of inflationary pressures.

Fiscal policy and monetary policy worked in tandem during 1969. Fiscal policy was directed at slowing down the expansion in Federal expenditures during 1969 and maintaining a moderate budget surplus. Monetary policy reduced the rate of growth in the money supply to 4.4 percent in the first half of 1969 and to almost zero in the second half.

Both policies were aimed at slowing down the expansion in demand. The gross national product, which rose 9.4 percent from the fourth quarter of 1967 to the fourth quarter of 1968, rose 6.8 percent in the following year.

THE CURRENT ECONOMIC POSTURE OF THE COUNTRY

Mr. MAHON. Doctor, how would you summarize-in two or three sentences the current economic posture of the country and the policy course now recommended by the administration? Are we now entering, or are we now in, a period of great delicacy, a period when we must, in the opinion of the administration, presevere in a course of great fiscal and economic restraint, of not upsetting the apple cart so to speak?

Mr. MCCRACKEN. At the present time the economy is feeling the effects of the policies of fiscal and monetary restraint instituted more than a year ago. The growth in demand has slowed down. The Nation's production showed a slight decline from the third to the fourth quarter of last year and is expected to change little in the months ahead. These are necessary conditions for a slowdown in the price rise. The task is difficult because if restraint is pushed too hard the economy could slide into a recession and if restraint is relaxed too quickly, the slowdown in the price rise will not be achieved. Moreover in the second half we wish to get the economy moving again along a growth path that is noninflationary.

ECONOMIC IMPACT OF OBLIGATIONS AND EXPENDITURES

Mr. MAHON. On page 6 of your statement you refer to the fact that the new budget projects an increase in outlays of $2.9 billion for 1971, or about 1.5 percent over the reestimated amount for fiscal 1970. We on this committee deal somewhat with outlays but more directly and intimately with appropriations and obligations.

The new budget shows an estimated increase in obligations of $4.8 billion, 1971 over 1970, which is somewhat greater than the $2.9 billion outlay increase. Why, from an economic impact point of view, isn't the $4.8 billion more significant? Do not obligations and contracts set the economic wheels in motion? Will you comment on that?

Mr. MCCRACKEN. I think they are both very significant. One does have to take cognizance of authorizations as well as actual expenditures, because the authorizations are an indication of what is starting into the pipeline and will subsequently be affecting the economy. I use the expenditure figure there simply because it was the conventional concept that we use to talk about where the budget is going. I would agree we ought to look at both.

(The following statement was submitted for the record:)

OBLIGATIONS VERSUS OUTLAYS

Both obligations incurred and outlays have significance for economic analysis. Fundamentally we are interested in outlays or something closely akin to them because we are interested in a current measure of economic activity. But we are also interested in obligations insofar as they precede outlays and provide an advance indication of future outlays. However, because of the long time that may elapse between the incurring of an obligation and an outlay in the case of procurement items and construction, a speedup or a slowdown in obligations does not necessarily imply a speedup or slowdown in outlays for the year ahead.

TIMBER BILL

Mr. MAHON. The controversial timber bill now pending in the House has, I believe, some provisions that would dedicate forest receipts to a special fund. Are you familiar with that?

Mr. MAYO. I am aware of the timber bill now pending in the House. Undoubtedly, you refer to the National Forest Timber Conservation and Management Act of 1969, H.R. 12025.

This bill does contain a provision which would earmark timber sales receipts for certain specified uses. As you know, as a general rule, legislation which earmarks receipts restricts the budget and fiscal flexibility of both the Congress and the President. However, in view of the urgent need for additional and dependable supplies of lumber for housing and the fact that the administration supports the basic intent of the legislation, the Department of Agriculture, on behalf of the administration, has recently filed a favorable report on H.R. 12025 with the House Agriculture Committee.

URBAN MASS TRANSIT AND WATER POLLUTION GRANTS

Mr. MAHON. The new budget has about $6 or $7 billion of new contract authority proposed for mass transit and water pollution programs. What provisions, if any, for annual Appropriations Committee control of those is the administration recommending, or would they, in the future, be classed as "relatively uncontrollable"?

Mr. MAYO. The legislation requested in these areas would authorize contract authority of $2.8 billion over a 5-year period for urban mass transportation and $4 billion over a 4-year period for water pollution. In both cases, the Appropriations Committee's control will be exercised through the appropriation to liquidate contract authority within the maximum amount specified. As with similar programs financed through contract authority, they will not be classified as relatively uncontrollable. The executive branch can and quite often does exercise control over these types of programs.

Mr. MAHON. I yield for questions on my left.
Mr. EVINS. I have a few questions, Mr. Chairman.

ADVANCE FUNDING

Mr. Secretary, this morning you spoke a warning against committing the Government to long-range programs with future long-range costs. Yet your budget proposes three housing programs for which increases in annual contract authorization are budgeted for 1971 and 1972-advance contract authorization beyond the budget year for the first time. This is the annual contract authority for the homeownership programs, section 235, of $140 million. This is for up to 30 years which could mean committing us to a total expenditure of $4,200 million. Section 236, the rental housing assistance program, also has advanced contract authority of $145 million. This provides funds for up to 40 years. The total cost of this program could be $5,800 million, I am advised.

The third is the rent-supplement program, which asks for $75 million, also for advanced funding.

Why is it necessary to have contract authority in 1972 for these programs for the first time when you are warning against future longrange costs?

Secretary KENNEDY. In any budget of this kind you have to have. advance funding. The program is needed for housing, which is an area of actual congressional law or a mandate, and one of great need, and one that has been squeezed in this period of tight money and budgetary stringency. That, I think, is the reason for it.

Mr. EVINS. We have been providing annual increments of contract authority for projects in the current-year programs for several years, but this year for the first time you ask for advance contract authority a year in advance. This will then require funding in such annual amounts for the next 30 or 40 years.

Mr. MAYO. The advanced funding, if I may add, is quite a bit smaller than the figures you were alluding to. It relates just to 1 year's effect. There is no attempt to encompass the entire program. Indeed, we rejected the idea of advance funding on the largest of the housing programs for the reasons you suggest. These other housing programs have peculiar reasons that suggested the necessity of advance funding to get the programs in the works, so to speak, at the local contract. level.

REDIRECTION OF NASA RESEARCH ACTIVITIES.

Mr. EVINS. Concerning the appropriations for NASA, we have already achieved the goal of placing men on the moon and safe return. There is a considerable concern now that there is an overkill in the

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Projection of the economy.-Between fiscal years 1970 and 1975:

The total economy-or gross national product-GNP-is expected to increase by $400 billion, to nearly $1.4 trillion.

Consumption expenditures are anticipated to rise by 45 percent. After allowing for population growth, this would result in an increase in per capita consumption of more than one-third.

Investment and total Government purchases together would rise by 35 percent to provide the plant and equipment, housing, and supporting facilities and services consistent with a larger economy.

The potential total supply of goods and services-potential GNP-will grow significantly during the 1970-75 period as the civilian labor force increases substantially and average output per man-hour rises. Actual GNP could be expected to amount to nearly $1.4 trillion in 1975, measured in current dollars, after allowing for a declining rate of inflation during the next 2 years, followed by relative price stability thereafter.

Economic and budget policy must solve the two problems of (a) keeping demand roughly equal to potential output, once inflation is slowed, and (b) allocating Federal resources among alternative uses.

Constraints: Revenues and built-in expenditures.-The growth of GNP will obviously generate substantial increases in personal income and corporate profits. Applying the tax rates in this budget to these larger bases results in estimated Federal Receipts amounting to $266 billion in 1975. Because of the termination of the surtax and the effect of the provisions of the Tax Reform Act of 1969, the ratio of revenues to GNP is anticipated to be lower in 1975 than in 1970. The net amount of additional Federal revenues and current program outlays will determine the margin available to the Federal Government to use itself or to return to private citizens or to State and local governments.

As far as Federal outlays are concerned, the most predictable increases in future budgets will reflect an expanding population and some further rise in the cost of living. Outlays under a number of programs (such as social security and veterans compensation and pensions) tend to increase on the basis of existing law because of a growing number of eligible beneficiaries, or to be increased by the Congress to provide for increases in the cost of living. Such expansion is virtually "built in" to budgets of the future. Larger outlays will also be required in some other programs, merely to accommodate increases in both the prices of goods purchased and the population served. Additional budgetary growth will occur as the result of future pay increases for Government workers. On the basis of the assumptions used here, the estimated net increase in outlays for current programs averages $7 billion a year between 1971 and 1975. The termination or restructuring of outmoded or uneconomic Government programs proposed in this budget can reduce these built-in expenditures by $2 billion in 1972, thereby reducing the spending base. Budget savings can be increased in the future with the addition of new program reforms.

The projection of revenues and expenditures provides an estimate of th funds that will be available for discretionary action, as shown below.