Budget issues : staff studies for fiscal year 1977


Material Information

Budget issues : staff studies for fiscal year 1977
Physical Description:
viii, 165 p. : ill. ; 24 cm.
United States -- Congress. -- Senate. -- Committee on the Budget
Nichols, Donald
U.S. Govt. Print. Off.
Place of Publication:
Publication Date:


Subjects / Keywords:
Budget -- United States   ( lcsh )
federal government publication   ( marcgt )
non-fiction   ( marcgt )


General Note:
At head of title: 94th Congress, 2d session. Committee print.
General Note:
Prepared by Donald Nichols and others.
Statement of Responsibility:
Committee on the Budget, United States Senate.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 026010032
oclc - 02819423
System ID:

Full Text

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U.S./U.S.SR. Militar Spending ------- 12



;ALAN CRANSTON, California JAMES A. McCL1 Idaho
JOSEPH R. BIDEN, JR., Delaware
SAM NUNN, Georgia
DouGL.As J. BENNET, JR., Staff Diredar
JoHN T. McEvoy, Chief Counset
R6BizRT B. B Db Minority Staf ifec
W. iaoxams soawarz, Darer of Puli"I"a"
VI)1 .
.. ...... .... . .. .. . .... ..... .. ... .... .. .. .. .... .. .... .. .. .. ... .... .... .. .. . . .. . ... .... ..


Lettersat. of .... ..it vu


Cot nd prices under direct Federal control:
A, ~e Mministration's bugtproposals for fiscal 1977. ----
B. Direct price effects of other, Goenetprograms - 10
III.Theeffect of the budget on inflation and unemployment:
A. The outlook -----
-B. 'The impact of an income tax ctit on inflation sand unemply

C. Thfnact on -inflation and unemployment of diret usi

Annualrate, of cost r8
fiB~t~ iihithe budjget----------- .^~1. 1~ .. .. .. 1
Inliio ad unemdiploymient on the 2 CBO growth paths. ... 14
Esimated effect on pricie level and unemploymeint, of various prograims
to reduce private costs--.,.......---. 17
Th omposition of the percent ofn io .......... .. 20

Hisorial relation between inflation and unem ployment ------- 22

.... ... ... ....... ... .. 27
Teproblem and alternative solutions:
A. The polm. 29
B. Gol.36
..C. -Basic approaches and decisione.. 30
U ro th: How fast? --- - -- - -- - -- - -- - 31
Ill Th,'"direct response" of the Federal budget to unemployment:.
A. A variety of instruments- 36
B. Enhanced employability and incentives:_ 41
L. Income maintenance for heepoae. 44
D.... Direct employment._ .. ... 49

Thel eerl ir tr po s unemployment..... .......... ...

Apedix--pppg 5ag )...5..:... ..

Unempoymphenthand espop~ unde two laxoeanmpli gowmth paths-- 29
Differenceo incepoymenuot by agemsex foarae bmlyachieving76 percen
rahaner thn 5ch ret vragerstc rea ou8 bt@tp t. growth---------.----.--- 33
Unemployment rates byracesexandage during the crent reion 3

Feerlangti-pblemployment prg'37........ ...a

iThe Feea ie responses lab fr unmlomnt re3sin0due 'e

"Dirctmenspaonse buget (roPath. B) ------------------..------- 4

Outlay from inoesport polgreaam for .... theemloabe,196-98. 4
Changesrncaaceit of unemployment---l had .. '55--.,----
Changes tion udgt' diec ofspn th seato unemployment'from aets .

.Chartsraduin graphs:---------------- --
Distributpronm and the Privideian laorfrceposdlrecesion-induce u.e.

UlT.Obectives f 'edralo asusisae. .ld ..ea --- 35------ --
Numbcl ear of nemloyde houstehold heaio 35

B. Anibti-recefsion ass-nepoyeistne....------ buge 3--

L Itroucton ad summary ----------------------------------65
11.~E Cret porm nhe President's proposals_______ fo66eorclgans.-

IV. Fiscalusior 197-bde issues and options:---------

A.der eneralt toevtnte sarinoalgo- rmet (o7l4
Gr .n Anti-yrbc fuss to n .. 76,..--,---- -----

Letsaw yenfrcement assistance- 80---------
eDer. Exclusionfrdomtlederal funcetaxes of nteestonuniipa

V Conclusion of-- n----------- -------- -------- ------------------- $

Federal:,, gans tmo Saeandh loaln govrnmec wnts (outnys)l6
rtttttt~iiI~iG rant outlays by function ----;;';;;' ; si;l;; ;iiiiiiii iiiii
Cost of ajor Fedral tax xpenditues sidin State atd localgovern-
ments, fiscal years 1967 and 68I~lii;i
Federal gants-in-ad outlaysby functin----------'---- -------- 7
Comparion of ati-recesion Prgrsms--- ---------------- 7
Comparisonof Presidnt's polic for bloc grants ptposals_____.&_ 8

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1. --'... .'- ..-- --- -- --- 9 1
BA -Scascrt.:-------------------------- 93
B 1 diae .....z. = ..._ - 9
C. Federal employee rieen.-- ----- 93

111. Inpoance of- retirement and disability 'pfrograms to fladil poli ...94
Relationships among htirmet ;ald disability programs ------ 99
IV. Majr polic issues

A.Financing social security in the shor........ 'r.n.. ___1.....:. 101
B.-Lngrun socia security issues: Decoupling and fiadin-- 108
rotection against entastrophie health care costs-' 10
D.Fderal service retirement and disability1
-..... ther pendin.. +g i 116....g. + 116

Q30 ath projections of current services outlay fo etiemn and
isp t prowrm, 1975-81---., --'---- ...----- -
Caeod and cossofe Federal income assistancere proram 97
Poection of the receipts and disburements of OASDI trust funds,

7 1. ..... .. + -+ - - + ..... .. - - - ++++ _+ 0-- -
Saig__der military retirement

Chars ad graphs.

Ovrlps in benefiliarjr groups, fiscal year 1075.. ------------------ 9W*
Ovrlp in beneficiaries age 65 and ovr. .. .... 100


P e a - - - - - - - - - --........................... .. ...- 127
nrodu tion and summary ----------------------- ---- ---- --- 129
..... ...et foreign/military 1o32cy...........:. ... .+.+.+. .. 13,
A Extealsecurity ...... 4
B. Internal security 139eain 189
III Uefulness of U.S./U.S.S.R. military spending comparisons ----- 143
A. Criticism of budget c prios143
B. Costing etolgis 144
C. Are the estimates u146
IV. U../U.S.S.R. quantitative force comparisons: Cost implications for
F Y 1977 bugt148
A. Strategic offensive focs.149
B. Strategic defense fre .152
C. Theater nuclear forme ------------------- 152
D. General purpose 154
E. Western Pacific/Asia delyet165

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Tank forces ------ ---- ------- 15
Artillery---- 15
Helicopers- -- ---- 15

Tactial ai missles-- 16
Airlift/ealift frces- 16
Charts and, graphs:i;
U.S.U.S..R. ucler caabilties 1975 15


TlilRl 4.)O3 'lipl RA BS

pers pied t repaed, asy know by the
Budget- Comttestf in cnetiowkwili th Comm ittee- s' osidera-
tion'of the First Concurrent Resolution for iscal 1977. Each deals
*i6h one othmaor unelyn decsions we cofo ted inonnection
*ih heficlch 77 reolution.Im believe the so lde available for*
futhr se by our Committee, and for use byother o imist6da
Mepersasthe Senat cosierpeciic fscao 7 sp ending legislation.
&etPoli T r ti diion
ftc-' roosdp c hangs,gs w1 parl taxes anddcertainssubsidies that
*iH~19*4 diety fe hs biin ill hav a mor., importanst
infueceonth raneofe inflation in fiscil 1977,- while physical and hur-
hian resou tosa -under-utilized, than will the rate of ecoiiomhic

Thepamonoverall fiscal policy, spendingr employ-
addc ,an ince maitenance rtn tj x lesti-
S 45 of thFeder

'men-tis m dte form of fancia assistance for tae une

rimarily unemployment compensation. Another 43 peent is
on edit lon anda i that Midease -employabiity.
6* 1: peren iss Iovgro aa uh b putblic epoment, publi
wors, nd countercyc c revenue sharing that dietlyinrease
emlyent. u
het ii J*Alic employment program, targeted on low-
incomelamlies who are receiving une1mployment compensation and/or
welareproviding relatively low salaries for only 12 months. The
anayss hows that the net budget cost (i.e., net addition to the deficit)
woul bebetween $2,100 and $2,500 per job per year.
FedralAssistance to State and Local Governments is an effort to
paekyfiscal 1977 spending decisions on Federal grants-nidith
contxt f broad Federal-State-local fiscal relations. State and local
govermet are a significant sector of the economy, accounting for over
15 prcet of GNP. A substantial portion of their revenue-on the
orde of 2 percent-comes from Federal grants, which are found in 12
of he17budget functions. Thus Federal grants affect a wide range of
Stat an local government activities. They also affect the response of
Stat an local budgets to economic cycles, and consequently, the ef-
fss of Federal stabilization policy.

Trends and Issues in Federal Retirement and Dsis ity Progras de-
scribes the major fiscal issues Conrs faces in the provision of cash
and health-care' benefits to the ae, retired, disables, and survivors.
These programs-which in e social security, medicare, civil
service and military retirement systems, supplemental security income
(SSI, an vetrass aD A~m~ pn4Cpa benefits-account for
36 percent of all Federal outlays ($150 billion in fiscal 1977 out of $413
billion total). The revenues co eeted fr social insurance trust funds
from which most of these benefits are paid will amount to $107 b Ilfiq
in fiscal 1977, or 30 percent of, the ttaIl: $362 billion.
n: The most, prosessg risume eqoeras the posiilt ofaiorqr
deficit in thesociael security trs. The per ithe
chance of suh a defiit ming f art n
many ways to deal with such aneetult. h aer Mals wei
the -long-ter fnaSomiag -problem and how ireasto vanious salrt,-

U.S.-U.iS.S.R. H ilita- Spendinrepoe oeo the major plicy
pressures behind the substantia rwhi strategiud geaera pur-
pose formsd provided in the fiscl 197bdgeL These ppeffures include
the security pereptions of the Soviet, Uinj andthoe01n passmfv for(*
stegh of NATO andthe Waxsaw Pact as well asthat of the two
super powers themfselves .The report also analyzea the v iuewn of
comparing U.S. and U.S.S.R. military spending in evaluAting the
adequacy o the U.S. defense budget.
These studies have been prepared by the Senate Budget Commaittee
staff with the assistance of .the Cogesoal Budget Ofive,. The
studies were undertaken to aid, the Buge Committee in the decis'ons
it mus a these ars wi r et eal policy end get,

Noting inhs stde hudb nepeted as,represenling the
vesor recomendtin of teBdt omi teor aW idvia

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W. Preface;

Thispapr wa prpard toaidtheSenae Bdge Comitte i
formlatng he irstConurrnt esoltio ontheBudgt fr Fsca
Year 1977.
Th ppe ws reard y onldNihos ndEdon Hggr
wihth sisac o aenShbekad atn se o h Snt
BudetComite saf. icae Oenan Fan dleuwofth
Congressional Bdget Office prvided the econoetric analyses

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1. Summary
Fwlpolicyniakers axe wel aware of the short raun tra&l between
n klaio and unemployment. The threat of renewe infltionary
presure is a deterrent to policies which woud whasten' the, -eturn t
l ployment and full production. In the present unusual circum
st swhen both unemployment- andination are high, policies ar
neeedwhich will cut prices and stimulate recovery simrultaneously.
ii% e suggeststhat policy opportunities.oI this kind areavail-
abk..ihoug modest changes in the 1977 abudget. Speefically, the
Pkeidet has proposed. to change several prices 'ard costs which ar
Uo* diectly controlled by the Federal- Governtment. :Some of his
ca s would incease prices, suchast the 0.3 perdentIin
masein Federal social saecurityr .payroll taxes and the increase in
unempoyment insurance taxes. Some proposed changes would lowe
pricessch as his proposals for Federal pay and Medicare cos

Take tbgether, thease canges, upon which Congresis must act thi
ypa, an: reduce the general price level by more than one-half of'
peren, compared with what, would otherwise be. Additional oppor
tupiiesfor price cuttmag byb the' Fede ra Governament could Treduce
pdrm y 'another one half perent a't le&%t, without considering
wconday effecta of price reductions on wage rates.
a hes proposals also have an indirect effect on prices through thei
a~et o economlic act ivity. A cut in payol taxes, fbr example, woul
ro~~ceunit labor costs and therefore t nd to reduce t.he rate of in
but it would also stimulate economi activity, and this woul
toadto ause prices to rise. Both effects are considered here. Inflation
-mused y direct changes in prices or costs is called cost inflation, whil
tha ciised by changes in Ieconomic activity is called demend inflation.
inttio. Section 2 addresses the effect of these priceztutting options
oh'dmad inflation and compares their stimulative consequences with
those.cused by, equivalent, cuts of personal iizicome taxes.
Th>rice' cutting options axe shown to have- a more favorable effec
elkiothprices and job&. The model used here suggests that there ar
pohiestht wllcut prices by eight-texiths pircnt in the firs
dunemployent by over 0.4 percent in hessecondya.T
ntages ofusine the price system In this fash"o are n~oted.

Thmpe, optiosoinl tispaper axe consdee hindpnenhrmhi
effect on the Feeral deficit. Te conclusion is hat cost cuttin

revenues by the same amount. Moreoverisod.b o jjta
poliy to rdetce more stimulative fiscal and monetary policie
unemployment more quickly. *, 1 1 1

I. Costs and PricesUnder D ret IFederalCo
The President's fiscal 1977 budget Proposlege t htw.I
many prices and" costs. These axe outlined here.
pct on inflation 'i's given.'

TWhe President, -proposed that. the socia eurtlayolta"b
inreased by 0.3 percent ion both emnployers and mlye n mr
1, 1977, This is estimnated to yield $3.3 billio nfsa 17 k h
first 9 months of 1977), aind $4.4 billion oeqr hfulya.T tUf
of the tax which is4 paid by employers is an incraei~brcssn
in the short run these costs are usually passedotocnuesith

A strong word of caution is required about conldgthtfsa lnlu
in addition to that rslmgfrom these policies&ol.bOpeL h
favorabtle bhorfu efetso these policies on infainde o e ti
safe to apply still more stus-o get back to te rgn iftoi'teih
benfi frt do yimproved retal growth.
Tereaetreraos or ,this caution:
()ructions in ther
Tis imerely a realizati
estimates If not increasing thekunettlyet pytntiti1dif
tthe rate of inflation by 0.25 of a percnaepittaoknt
mean-, that added, stimulus totaling a ,5ices h
tion rate-by rule of: thumb giving0.5
unemployment rate-ghould be adopte.W a;hoiee i,
condlu de that adopting, such a policy cnb xetdt
at leost 4s much real growth as tax rdcinpouti d~
pected to be lower. A policy that woudhae1,10.
was no etioned i' the paper is a wg a, rdt
(b) The reduced ,rate of infiation resul~tingfo!ue blie a
influence prices directly may be only 's~t-u~hnniih
theplonger-run effects on the rate, of inf#iPw: Q *al
espossibly' zero. Theref ore, to ape
eha5 provided by the direct pIc hlli
rate t& inflation iii the longer ruh .
(c) Thie short-run trade off between inflationmduep&.ec~,n
co Putn thrugzout. the possible range:o~~mlyaa &*w
real0 grt rates. 1n general, the lower h.4epQ~nrtA;
th6d Inr rapid the rate of real gro,0"th raeWM1a t
I ~increase in theirate o6f inflation frotn ddugto iwlIA
stimulus. Therefore, the gded stimulsiadtonothtP.
vided by the direct prierle'olicies woul fetta ifainrt
more than it would in the absence of thdietpceolis,

f~ri. 9. erpr~det p`ce T66'xlria 2.2 illin inostsreprsen

ar ft~t' Pncost hi )rose coaser
$20vifi~i sal: 10'li) be, paid p tirely'by 'em ioyers. and
hosta-h full' quart er ofa,percent.

1 1 m

1 LP .....L

1%( d with,,ich these osf i -erases pould betas' e ino
tuee4h O'I e r'yn stt d- gests thia 75 percent.'
of te mcresewoud be'passed or nm'i the:'fiMf:y-ear.x
Thee i alo ome evidence that. Prm&r pamntain their traditional
proft mrgin oncost increases' df'this kbnd. If this is the case, the
lonrru efect9n.wies could be greater than if the: costs -were, simply
pa~d~trpuh. o numers.
lgno4 p axkup effect, the Gross National Product 'eflator.
-F~~d.inceas by0.19 percent *in 0alendar 1977. as a resul of th%
qosd icresesin payroll; taxes and by more than 01.26 in: the long
iun, Te efec ontheConsumer Price Index-a. better measure of the,
Q (4 f l~in-wul be slightly larger.
itePreidet'sproposals to reduce corporate and per .sonal incomem
ps, f ttosompe exeth, effec on prices of the increases
in.yrol txe .Th evidence, hwvrdoes not sugg A that thi
3e wlle.sinicant, at least in th shr run.
TheFrsidn thas proposed to limitflWederal pay increases to 5
pi~~ei~m Otoer 1976. Assuming that comparability requirements
*bul cal fr a increase of' about S.'5 percent by that date, an d
assmin futhe that restoration would have been made of the

4 ttain.
lpay increases affect the Gross. National Prodct
6fut he Consumor Price Ine, the effect of this proposal
'66w esuedrate 'f inflation depe ds on which ndex is being

at of 'iving will be lower as a direct effect of the pay
resrait. et hevigibility of th6 Federal pyraise sugests that it
poe o set p gothe wag deii .,hsthe effect
ed oy- eRt .ai-on ah- cost..of liing. is Indrect and its siz is not-
i u
a, .:he. ts omission, does not imply that the indirect effect

e ... ... I
irt 9vag mres Ao 5 percent were aoped a
WA n ayxsramnts.
dentas-proposed to-increase-a widle vArity of prcs n
.%"e tht ax leied on the users of govermment facilities.
Postl raes ould rise by $307 million more than if the subsidy
im&,Jn furth,-:lask nailo*eria -extended: 'at 'cu~rient
Aku;.,fhePotaService hag requfstcd- the etnin
L. Shulte, "Falling Profits, Rising; Margins and the Full Employ.
iienl~t~litRat," rookings Papers on Economic Activity, 1975:2 pp. 449-469.

Masn tr0ansi subsides wa oulberqe~uoe Th.Pes at-4
'0 wd B thaony5perenots wre pa vd t o9
massta nsi t aid i e df;ouiberue&tsu ,efrs:Ian
iiiiii iiii iiiiiii ........ .... I
Mansc;;z; CA
caethat 9pecent ofte$4 nf euse for reimshfrseme:l
grnt ould hav Te beenpused fo coresubiiswtou so.

Tedi resi ii propos to ie i
ficare tha7tb cnqaliyfo eimbursemen agundrMdcr.Hsia
wetiildl bb @9 by $22blio h

prouold Tbe premnitted. Thdet prpsedcstmcra reaou ixpr

r ucioiii ui o te
centag pintse less 'fthan teiro rateeo ices n17.Iyi he

~iii i i
aben rce oohf then pro osed cotrols thee priewolcntueo
reutions ldue toedtt this prsoposalaoewudb ot 11 ilo

fiscal 1977. ..he budgt message argues i toa .
prpoal hThe remoainng budgcetn chaviges wudb u't rci
Itris nontcerol whehe med his cpropsa woere afet-edclcr

iiiiii ,,,,
ecost noi terstablztof thpeonomy sinc no ontosaepooe o

The oithlervpooas ocrncags'npices n costs that aren s
alrad publiclye adMdeterind.'h195
Prieh onr ol rcs on mhedicalcare were resnbyefciedrn.0

C P........

Seconomic stabilization period
* ther lasot 20yeares -T etrednd ia en mothvdeteiceth 70cpe
mlonof Meiarerwan srtxsnd Meici "'n16.Te tabesost~.im
behavior tof priaes inthlteso$9 meicllcaeionsty-
iiiii I te 997 8:4

tutona ohnge whchwouldh promote prine edc
fitaeroot- at tha ue h measures employe
pitds'to~e~rain inflation were targeted toward short-term effcece
.pg -egaployee salar inreaese, and frdesing satn
ratosraterthan to more raioa control of long-term -cost.Te
expyioaly arge increase in eical prce inl197- was., in-x,&
zaton cost increases that had been suppressed duringte
bilization period.
1 Shoul beakied that non-Federal medical care costs woudnt
fA an- eoad-even be incevewed as, a- result of -this- proposa.Ti
would h ape if hospitals did not hold down costs and raised cags
tmant-Medixa patients by enough to cover e
tiets. If -he prices charged to non-Medicar pa tiens r n t
2&te by his. proposal, it' would reduice the GNP dfao y0
h rdutioninigrants to State and local government woldhae
an uncrtaineffect on budget. decisions in those jurisdlictions. px
oftth reucion could result in lower spending, and a part in ige
taxesIf alestaxes, property taxses, or iother excise taxes ee n
crese, picso an costs would- rise directly. The size of thseta
merems hasbeen estimated to be about one-third of the sizeo h
redutio ingeneral grants, andr one--fourth the size of cateoia
gra, t.3 hu an $8 billion reduction in grants would ca~usets-
t~t~ t i~,'yabout $2.0 billiont and wudcuse th elao o
oat b .11 percent.
se. by a out-

Rrs o Ie proposals described above repreets a requsyte
A ~~~ tiinthtmay be subject to controversy iathe Cnrs.
Tjwpropo" invlve changes froma current policy budget levelfo
it*)~ed rocedures, or from prevailing prices that are beingchre
W'&*ve noen enterprises. Factors other than inflation, suchaspo!
.y, will also have to be considered.
The otaldirect effect on the GNP deflator of these propsli,
%3aodtob1-*4688 percentage points as shown, in Table2.Ta s
indx wuld be higher by more than 0.68 percent if the inflainr
qf~m ere,hosen in every case than if the alternative weechsn
Skceamt o the *d dwitration proposals would reduce pieta
nat~~ ofeof-hAdminiatration's position would be to raieW eltr
by: abut 4 percent, though the effect on private: prices andcot
_Oi mor than twioe that. These: estimates are su-mmaxzdh
t b w.
1110ohoud e noted that the indirect effect on costs coUIalsob
subtatilthough these ,estimates have been ekcluded fro te
t~wk wolincrmease could moderate in the future, for examl,-i
creasses could be avoided Mn the shorter term. TbNte'

91'mkip n* w--2tvt,-931

to Ta~ble 2 -below dedkrthe how the'es~tiated" wer6 ibA46U.ta
are show n f or both the G NP de llat or -WM A bih 66te rs thtii b
includidg the government sectoi---and for -the privatbae iorsb

Elect on '1~tOq
GNP prytiv
Item deflat6r bt
ro increase in ep .oyeep.e.
000000000 ------.------------------.- ........... +

Iiilt Federa .l pay i.crease to. 5 percent -.-----.. .
irease in user taies by $736,000,000
M edical eare price controls ------------------- .... --------------
Reduction in telephone excise tax (mandated in
existing law) ----.... L ........ -.02 -.0
Increase in State sales taxesth oldrul
fro a reucioi grants of $8,000 00,9000--- +4 11 11
Potenitial inflationary impact oft he Presdent's
.....prop osals ............. ..1.....+ 14
Total difference between. most inflationary and

iiiiiiiiiiiiiiii! i i~ii~i~~i~iiii ..............................................................................
le.ast inflationary options- --------------. A8

The estimates of the direct effect of lower taxes and price on the prae Iev
were calculated as followis. For the GNP deflator,. the dollar v usof hprosJ
changes were divided by the level of GNP that is expectedt the dioTh
GNP estimates are those provided in the President's budget. The payrl tax
proposal Lwould be effectiveJanuary: 1,1977;. It was. divided by $1,890 billin, th
projected level of GNP for calendar 1977. Other piroposals were calculated under
theassaumption that they became effective on October 1, 1976. A GNI op~ 9
billion was used for these proposals, since that is the level di GNP ge
fleeal 1977.
The effects on the pfivate cost of living were estimated by adfusthigthtQP

estimnates for two factors. (1) Compensation of Federal employae ews wnk im~Ae
leaving an adjusted GNP of $1,770 billion for fiscal 1977, and
cilendar 1977. (2) Those prices notpaid by the private secto---such d
salaries-were not inclqded in' the private 'cost of living.
The,,prop osals discussed. a~bove include, only those changes! facm
current poliies that have been specifically pro osed by the Fresidernti
A wide rangip of additional, optigns exist if Dedera ,polioy weibti:W
deliberately seek out price-reducing measures... od
First, and most, obvious,. wherever an inoraweae in pr iseeihad Mew
proposed, 'decreases are an alternative to be considered, R AB~04ake
for examplq, can: be reduced: rather than inoreased. and pzide&*oald
then be, pushed down',rather than upi. J.1U le0 i.!.
Second, some additionaj budget proposals exist whichi cqlldf asbao
ifation but wh ich do not involve direct controls ove pra r.. g.
_p AD~er Vre*0V

The, Presiden t haspr'oposed, for example, that $870 milliounrtto
ruteri& hp bepld from s4Ttrategi military Istckpikhs TWho WsojVould
restrai increws es i6_heprices of these matetiAtsby)An undefernhd
amount. *qqI.g
C '~ Z7

.. M .6abudgt -so fflect priees:in manykpways mrie 'paehere,
th.Pt4 dent -as, not called~for j major: ohanges`*-The liastof changes,
above for which inflationaxy price, tags l-e belen estimated was
Aelected because they require major budgetary decisionsfordfisedl 1977.
The scheduled,-,expiration oaf the -telephn e xcise tax coquld be ae-
ceelerated, foer example.. Interest.asubsidies for home buyers could be
expanded, -Subsidies, could be,- idereased for AmTrak or the Postal
50eryic 4. Gasoline, 4 obatso, and alcohol taxes could be reducendd..
FQourth- new bu getoptions could bespropeded that are, Ispecifially-
designed to cause price's to f all. Grants could be given to State and local
government in exchange for reducetions in sales taxes. These programs
could be voluntary, though it is unlikely that ,any State would turn
dow na chanc 'to :reduce' its own citizen' stdxes, particularly' if it
thought zthat te fede nal grants would :be permtanent. A $10 billion
prgrata of this kind would loerthe Consume Price Index by a full
pereentage point in iits. firs year. The m ore bradly based GNP'
deflator would fall by less. The Consumer Price Inidex als h.as a larger
eflet n pivte wage decisions than the GNP deflator, so that the
fbeedbck r such -price cuts on future wage decisionsi could be
lFifth, non -budg tary government programs can be usned to change
rices diredtly. The Vresident has proposed that transobrtation
regulations be changed so that shipping rates can fall. Nati-iral gas
d pe urlxnc prices are deterinined inlarge part by e, Federal
G~vrihent These prices have, a substantial impact on the geneiral
Pn elovel. It has, been estimated that the difference between the
high ,s, and -lowest propos;sifor petroleum prices that were seriously
&nsiered iu 1975 involved two full'percentage poinsi the price
_]te. serve-e important purpose mn guiding- productive resources
Wta those activities which are of greatest value in a free enterprise
seonomyr. The policy of direct cost reduction which, has just been
described would dull the effectiveness of the price system if the cuts
were pushed too fax, particularly if only a, small number of products
b :Eolved. Ir~ces fall when -postal rates are etit, for exaple. But
estiaW, rates' are, out-- too far,- the, public .would-'use the mhail to as
gtor, extent -than thiey should. The Postal Service-would then have
WXpand -and, te public benefits of the- expansion woud likly I be
"tenls additional costs. Some feel that postal rafhtes- elrady
te ow dd -that the aubsidy iWhould be ended.
Ijo thsr Aso t i" 'best to conceritratU mar0r cod Urdiuctioits on
sales or the payroll tat,: fremp, ulnodistrt priv"ate alloca-
tion decisions while lower postal rates might.
A dilemma -arises in casegtlike ihe4ot'natu'ra-l gas where a higher price
is needed in order to have consumers economize on its xise. If however,
the: h irce, darbo be ofstC.cusi te publicly controlled
PAiCe d 1461 oh~ihr price cannfot be accomhpani d by more fiscal
andsi ir Atl us, then a rejection of the. pr~ice n res a be
considhbMUf InnceonA hit, it, iW 1 de to hoth minfltiont kd un-
f~el~ii aiibd by i~v 6'6k~i ile`ijud b

weighed aganthe ineflatiowere toqe"W hoeate' OC8inT hiae
Iti: n thsregar, one muthe question rthe overdn imotncd'f
havingemploersipay for thl rhe unml.1eatco
orpforotheuse ofth prieriayroll tax to finance the Som ecuri SystPem

Grants fro genercal revenu sema violate the picpe ftesses
But ths efect must be wlemaighed a st the aveseefet-n.iitt
and~it unempoymenolte pnayryol taxesn that suptteesse

wilreuceithe rt e of inltion in athesortru. Butpiccus
ar ~ p ae "oesot n ilrl haeno adiec effect oftueiflto r.
unes teyare repeated.aTherdinglyu effeto hspliydpnso
isefct, onwae raesoo.wul qnsees
-11stoica. wag thsretatleent hrive rutspronddt hnenpie
inflation.Ifwage irnflation iwereateiresp

reductio in price, the themslongru rate oinlatoculberde.

furtherbesredued of prcs The wage-prie spiraloudb. atal
Evencwith ah bnfcarl drecslyonsefro wages direc rcc hud
notscol be viwdasa dlernatied to presponsibe moeay" icl
policiesob t ascopementary ditorthem. oThedrec prcpuspoie
ap oportnit ordc h inflation ratelpermanentporwryhout
chang~ te raduted of realeonomic gerow th.I oeayndfiu

poliieswer notrmmedacordingl wheddelemlometas
al olcy an monetary ;;;;; po ;;;;;l;icy int;;;;l

apprachdteeconomy woul dsoeoi n rever ttol itdriiaihrae
of~ es inltinnd thiregardthe pice thuts prvdeaoprtntyt
tio pemndentd.og:e wt herc
The budget hrases ar h major dirc nlene orics h ae fbfan
tionti coul berdueny a oint or more.truhmdr hne n
Ppoe andcost tha arediretly nderthe ontrl ofthe overment
New programs ould be devisd to spread te effect of tedirect price
reductions more broadl and to increase the ize of the general *
:i" siiiii~:X uiiii;;iiiacli
on piceswithut srio di tin othr prg~am eeties. ba
reducion n inlatio woud betempoaxy nles moneaxy nd -isoa
C -h'ces wee adjsted t takeadvanage o the pssib;y, tht wou
'cete o aprmnn rdcto n n m

poiytr 'i

and pnr e m creases are the major de i
of miflation at any point mi time.llll;

... ........ ii,, ,,,,,,, ,,T , , iiiiiiiiiiiii i i i
Ip /iiiii ii iiiiii
The growth n drenfiftLan ito -afty ,pricest and shaes the
Qf wae, andpiey supply.- A maore flith dom 'inant.
it ................
fiffing eh rao infl fl6tithe Ionmit Thlk
fabscalMA'renteain on ind grwt ran. 0,o
ong a ruec,6ts f'~adi igl'dipieton the ratb tb
gr6 thyp monitey- su po.' maffec~its'gowt AM 1616'
imon b~ ec oriends ing howe qu ckly the curen dhad b n-
Eh Montay oic athroug dieam o~yand socih ave mre

n 6licies
c' on 'i fisclresqgtr in atnan nepoe
adiiit etim.eon the e impfact oi sutn pin.


iiiii ii ii
i i
'd t Comi~ittee trongfi ffee-ts he growt of Uta
and by recommen re dingu..... erh r, o r c o c d ....

"iii~_N ,,,
flti s inthar poulicyn thog fisca tp lcy an of the ame bdgar

b" dgetdeficits
NOw 6 Ef yte of theoa4et 'on Inflation and pt all ofe by
Z4 thi top estmates of themact wofl cost-uttin rom th 1oir
re 0 bansion.r Bt cotrled costims could.a!reduce the unet, 4 .4-
:1 *t ,rte oe, tinfwoldio and ampcom t enct of the same tbudgetar
R.al o6~l nepoy et Wand io ain would departall off h nan
c4.h ate :of c i~psttofwchglyb oeyplc
er ate, ofbemandal tio thacetpr ould reyscultfromel ptheularger
economic wen: special Butflae'etionare iniactorter that the, net.el of
wpu~e t redceanfltbnandu ro ioymenit ath th sad me'dtimr .16
1031111 i aevel, ofunem etodah .a tie South~'eerPlnsold hnave

0 Il '

i : :,;: iiiiiiiili
tos te moste impoxttr- oforeseen peciale circumstaOces :

No onehas abletofores pe vy
inecetyars when spcan l inflationaryl factrs othernithaln thelevl of74
ftwiaw f aaitre thave b. erento inhmo late 1974ane.Ad th world95.Th
o~rice-hrse col hne.htanedahrd forece ast b several percenTisistageas

pont. bd arvs o~t du topercyt. in t pherouther Plan woul havder

&-visible smaller impa. ear, unforesspe r ums it an
ofnerve thisind, oulookisroughly Ts follows.'sh her

iiii ~ ~ ~ ~ ~ ~ ~ ~ !ii ;iiiiiiiiiiiiii, .iiiiiiiiiiiiiiiiiiiiiii niiii;iiiiiii

With unemployment rates in the 7t range and with tia-
tion of planit in the 80 percent range, there can be no inflation duie to
excess agreat demand. The demand for output will-resaain below
the Nainsability to produce for the next several years. Most of the
inflation tat occurs in that period will be due to factors other .than,
dempand Slack demand should allow the overall, inflation rate th de-
cline and the pace of that decline will depend on the level of demand.
Thge Congressional Budget Office's (CRO) Five Year Budget Pro-
jecti.=- dscribes two alternative growth paths: (A) 'a path which
averages 5 per cent real growth between now and 1981 and (B) a 6-
percent piath for the same period. No discussion of the policies needed
to attain these paths is given. According to CBO, the rate of inflation
should stabilize at about 6.6 percent per year along the -ast path and
gradually fall t 5 percent along the slow path.
The purpose of the two CBO growth paths is to point out the efec
of economic assumptions on the budget projections. No discussions of
the mtonetary or fisal policies needed to attain these alternative paths
is given. It appiears that money growth substantially above the upper
range of current Federal Reserve targets would be needed ,to meet
these paiths in the next few years. Despite the limtiations of the- two
path91 thedy-do peritd a reasonAble' assessment of the impact on'ihffiA
tion of a more rapid rate of economic growth.
The inflationrthe is higher along the fast path than it 'is on the slow
path because resorent'e are used more intensively. In -particular, un-
employmient rates are lower and wage 'increases are higher along the
fast path. This is due, in part, to the more rapid grok in te -aoney
Supl that takes place along the fast growth path. The: differen~e
bewe the paths is displayed in the following table.

Fast path (A) Slow path (B)
Unemploy- Unempleg*
ment Inflation meat Inflation

1976 ------------------- 7. 4 6. 7 7. 7 & 7
1977 -------------------. & 6 4 & 6,.. 7.54 .. & 1
Tn 78------------------- 5. 4 6. 6 .7.1I. h 0
1979 -------------------. 4.9 6. & T & ..7-** 5
1980 -------------- ------ 4L 5 & 6 & 'S -.*L
1981 -------------- 4.5& 6 & 6 &W ..'er-
Average.. ... 5. 516 9. 5.'7

Between 1976 and 198 1, the fast pith woild& propc" e an' unemiploy-
ment rate that averages 1.4 point lower ahdlai -inflation rate 4kga
averages I point higher than teslow path6. Ao>t&ifa'i ot~e
to decline iinder both pdths bUt not ws Vucl n h ie h
total diffrence betweentlhe two paths" Amhout toa a~ble
$1,078 billion of GNP over the, 6 years.
sr: Al V

.reucd y ravduall estraimate demnd thseot ithat anm enormous,
pos iersa ofincomplxoymn a1ilind production.duhe rik ofeanlout-
bri~koreabsed inflasstion is minima whyenr a resource axe under-
';e an 'rowhmates are ositnot exhessivae. Inflaionedoelsewnot
te thumbon the ast, derve Vrothi palculGive the oor
Co~, f r'b'dhg-e idemand *nlto, ith isimortarnt eethat auneopportuites
treu e othifation benfxamion.Eedy .2ecetta eunml

e~ o 0.1 prviedestimateis frleo thims reorta a permaent cut
j).,thi pesnlinomer tmax t of$1illio wouldgeducea thi e sug empy.
uetrt*b. iout 0.2 psuedfoint thi ofia h inflatioi ne
Wd~ppm taxy ess tare 0,t 1h afterc5 ear.an eut of iqathe thax
C4t. t eetiemathes axeconssent with rrestimats pulse elsewhere
ul -o thumb thatdeies fro thiclclation ise toult forl
ifto, deaecange inudemW and, it theshr-u effctmen unmpoymnt
ipgb~t t1`e thact, oninltionl. Evey 0.2 percent. Sihaty the unemplo
inA*.togglen rate of 0.21 percent. T is rueqtubin add useoful guiductl
rates ~l, te ipioare wimpact wilhe. large hnthsrlt.tgs
G It ~oudf nt umbe asuedafrom chisstmae tha inflation toca smustm
met ifincmetaxes ax cacult. The co.1 pe rcent of inflaion tha
w reultfroma. Ath icomrentxct repreents oa chmlymnang frmereat
therie tak lace. If inlaio prates would oterwsoisted withb
per r.ev GNP D, d tlallouth th naten f billion. hsw-l-e
qjlar'incwt'g cut bth iaionl byt 0.4 .1 percent.iiarly, pithes.uci
06. n yrowth rat of 0.2erc rent is ineadditionto the reductlion i
st refdtumbon reatin cangecinflatlrpion tocanges in shown
M`-e& peremits s tso caluated wthe cosloet r of. euig inflation bry
irlc~g.euantif. Athcrent ildevtelso grear ikYelioo han inreaserc
whc ym clicnet rtof02prentwn will bo e fsor'thed with at
ucioh'nressoal Budget offce aboutry H9lo. This woud How .as# Cokgre

mad Swte, netme 1975.mntad$9 il i
is 2 erenti 1
t~t.,q: edcto ae c~salerpi tg:asisshw

t IN, 1".. W~ iitichy'Qu nduge recesson will not b,14thwming a
e I pp.i
1. W, 44

"grssmg U ~ffce Re'0r.V;. 0t, a nd

CZ A r M P00Copp

A), ..flli, 4rv'
V Vr~rr"i""ll ~iii

4& redaction ith employer pay4
just''as. a. reductign i-f the income tax ol.Ti wudtn o
pile p to rise, .But the payroVl tax i lo.apio 6ss j,
,Cos& fall, priose tefu to Tall as well ~ho leetp ocf,1
laxii Thaiuesioniis considerei
Temany diffe..rent costs that coul ectd '-` m
waou) haveo vwy' different-inqmcts nifainidueW n
Their direct inflationary effect was decidinTW &he- tirt
effect depends on several other factor.()I eed n.h
with binch frimas pas's through theircothag' onues
depends, on whether chianges in finalpieue A`vhib
iiiiii v I v

a~n'effect on future wage decisions. ()I eed'd~h'koon
iiiaiiiIrred from the public to th prv
funds that are transferred from t
ordor to'bring'about the reductionincs.Thdfert og rw
described above could differ in thesetre,~yad oeo te
differenAces -are hard to predict. Theefctothcstrdtinon

,,iii :

unemplonentiwill alsoivary Prith 1
public to the privae sector has anect
unemployment th~it is easily'separatefrmtefec.thtdies
directly from the price reductions liseinTbe2
A* payroll tax cut would providefudtohepiae:Scr.O"
wo~l an inct ease in the Postal subsdtemasrfit uiy o
a reduction in sales or exci se taxes.Terdcin'Ptve ce
that -ar6 regulated'by the governmentsc stetuln r -'r
costs or naturfal ga prices, would not rnfriyfn't h
sector. And~th6 price controls on Medcrremusen'e
Wage cotitrols -on Federal'e e I oes wudrdc h ud~a f
traisiferitki to the private sector. The fet ftecs~~&c11
demand inflation vary directly iFith teaon ff'd e rih-
61-red, anid'ate about the same per dola< steefcgerb
for the transfer- of funds through a reuto nteficm a-2h
is, the aggregate demqnd pressure61 bewbu h ame hfif6
fund& are transferfed 'by reduchig taxso eui,.k r oa
progrms--such as th proposal to c
oniili di'W a-t6
be noited that demand inflation anad cs nlt'ae
samie time.
B0: was asked to perform three the, effects on unlaeimployment agd ififlto o ifrttkid6'
reduction's (1) 'The Ieffect 4, a pajrl a etyin*A Ad
under the assumpt~ion that, a changeintempqr wwol
final ptikces' as fast as,*would any' othe hneb ab ot .
effedt of: a dirobt riaduction. in consue ae t d tw
and~r he assumption that this-wouldhv~osig ei't e'A
161f Y

wage decisions ; and (3), the same caluainwsp =6
except. thatit waassuiued that futur aeifqnwu~
to the -d-irect educetioniah pric's'-'he* Wtwl
tions were performed for a hypotheial0bM&porm
effects for smaller programs can beetmtdbreIn hs
figures proportionally-,

.:,,,,,d in Table 3.:

tulannk ~ ~ ~ ge are shumiet pt~ yt m emastn z nts
Th effchts ofuthese hyoteicd wol hlowe es. Ioc
One sthid sul fom tfhe tableiasn th pwerof cos qiepkredutoasn
eeonmaio-thls. Costim reducton wo' sticeu-M cthe ee 'nomower
hl-ovrniembl to- the pri ate 1 setrb he 'sm anpomount lasthea

hig, heprice cuts are not ofset in all cases by higher prices tha
rt~ltfiam he hihe level of economic actiwity that takes W~b91--STS 4ATED. EFECT ONPRICE LEVEL AND t-NElWPLOY-

m nent Effect on price level
rate in
2d year 1st year 5th yea
Percent Percen I
(1)$10000000,000 cut in personalin
coetoax--------------------- 0. 2 0 +0.5
.2 $9,00,00000 cut W employer pay-
014 $ ,1, It0f0 00 Ma o
Pimwith no Qefect on future wage
inn .4 ---------------------- 58 .-.8 + 2
'(4141,ro00000 cut in consumer
dnrmal effect on future
W...o.. .. inl to -- - - -. 8- 1. .3

the itpotted in col. 3 is the estimated cumulative effect on prious ovi
15 pas. tjiroat the: estimnated rate of inflatio in the 5th Year, but the sum of. th
la4Uu taestfor the 5-ear -period.
'Rduc:tons hin P oll taxes would work with a lag, but their fma
9 ge-wvud besbtantial. CBO estimates that 43 percent of a re
',ci.m eploerpayroll taxes would be reflected in lower pricesm
t4 &t r ear.an 47 percent in the second year. After 5. years, thi
Al a nadution would be just offset by the mifatioanry effect o
S 14Unebployment would fall almost twice a.
pluasi would if orlinary income taxes liad been cut
I'euepoyment rate would be 0.4 lower After 2r uep year%
compredto a reduction of 0.2 that would result from the $10 billion
a cut. The strong possibility that cuts in employer payr
taxs cul reduce unemploym~erit% twle as much as an equivalent cu
1&ilcametaxes with the same effect on prices make's payroll. tax cuts..
p~liY woth serious study.
br in Table 3 compe froja a model of.inflation.; a proodes
weltAneratoad. Therefore the estigpates. must vie. evlut
an Etiaes f phne U. inltion resltn f"-inqn
Loweve, aemre lieyt l~orreot thee aesft
.0 ffatioii (ihe level dtepending on: otlher facfors such as: foo
harvstsand OPEC oil prices.)

Diect cost edeuee on was shown ,tobe&, owru tmusleoe
ofths it would be dhaigorous to.use. ti oiywhnue1ma
rates.wren already low Since the priccus ae oef~tmls
iii !iiiiiiiiiiiiii HHHiili

they would create hrageif the. econ yf
ployment. For' this reason, the policyo otrdcin'hgntqo
teired much r at6ionbefoe.,It wol
aptply this policy to -previous, postwainltosI: W he'mwu
naturae .o the present inflation thataks;hpoiy irpzt

..... i ~ i iiiii~iiiii~iiiiiilsiiiiiiiiiiiii
The oliy has d
value added tax in an attempt to redueifaonwtutncasa

uwnemplymn he United" 8 Id d" es h
toaxthat col be8 du at thsli tie.
I Most Federal excisse taxes have alread eneinntd aywr
reduced in 1965 in an effort..o curb inf T
dur~ing~h fis tr f the Nbcon Adminsrto o h aeproe
The secnsimy weas mccloser to fullemly ntithsyarad

oReductions in prices and costs c~ontoldb te'vntfe
promising opportunity to reduceth unmlylnra6iWfti*
creasing the inflation rate. Most- othe ore fgot-hte
p$ublic or piate, wou1l lead to more inltoth-ite, bW
stimulated by direct cost reduction ygvrm i, eo:yo r
iisource of growth thatiwould have

ii~~iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii n ii ;iiiiiiiiiiiiiii i iiiiiii iiiii "iii ""iii iiiiii iiii s sii "ii bi iiii
flation would come from pri uts in i
ful harvests caused food -prices to falo-f Inesw aOE
ctubed petroleum pricesiofal the eonoywudb tmltdu
prices could fall at the same time. But wihteesdilf& sb1n

,1Wrough moderate changes in a variet fre '*doil Ii
rec ly controlled 16y the; Feeral Governmenteiioo employment rate canl be reditced'at the ae6i.AseC

must be balanc'ed Min the long run" by reutlysii h e*l
tary and. fiscal stimuli if the reductioiaminfains hb., tO
The 1977 budget del-lberation's presentarmotfi "r iy
begin' a policy' of this kind.

ia# ndfiiefi

The, shmiltineous ekistenlce of inflat 1 tb e
ithe ecodomnic prob1em of the hist 6'fewqi
ece. It wargubd:. abov* thatilhis lnbi
of cost red on on bthe Oaft: 6of go e

SI 6e me time. Iorde: tO
gtd emma, the history, of the
recent ~laitio *ill b discused her6
(a)th inlaionwa strtd ina few special sectors,
(b)~ ~ ~ ~~5 it"vnufl pedt ter sectors of the economy; and
(c)tha as-a eslt,' te -ndrlying rate of inflation is now quite

igh b histpical sandar4
it s was dffcul t searte cause from effect-when interpreting
ecoomi hitor.-'ue lauib. ierpr~tation- of the da~ta is th~h'e
'Jalatorrwascagodby grupof speedI-factfprs1 tat hiereased rcs
andcotsM* te. setos ~t-qysion, and that it was not cau~d by an
excessively~ stiulte ecnoycrease in costs tended~to drain
e eo that mp ent rose wit
td ng s it .wol if the inflation were
,While,&s ~ ~ inerrtto scisist nt with the data, it shouldl
",b'noect tat ric-cotrls ereineffect -hrough m~vuch, a thie period,
and~~~~~~~ tathypoiea mrton qualification to-a~ny- conclusions
thit ae~raw. T- isprole isdicussed further below.

Thedat piegetedin abl 4.brek down.th inflation into several
comonets-46d, n~rgyimorts, and 'mortgage.interest costs-for
eac 6-ont teral inc lte 1972. Inflation a ee~p to be under
conro i 1,t`.'97.-Ovr-helast 6 months of thtar, the Con-
-sed at a rate: of t per year.
Thatwasabot -to pint loer than. its level oo 3 yearts before. The
infatin asistibtedreltielyevenly over the vatt" ou components
of he ndx.,F~pe onrol wre in effect and seemed to be working.
Thegoa ofthe 6otros ws -o-get the infla'tion rate below 3 percent
e972, tis was accomplished.
Therouleeg173, when prices of uncontrolled food
pdpergproy sbegn o icrase.allt% -dube-it r#,tes~ Wbile
di.ntexperi eae, tip inltion, the average
-Wic lee& icluing ootandenergy rose 6at a rater-df 8.2 percenit as
li that average,the food component
,nd the'energY components roseat.4
factors together -rose at a:rt eo

n ateJq,31thpdivrgeceamong.,product prices w*as eveii inofe
Oh~u~bli.-TU 100 sp fallItors,%thax ae coasiderqd i- this,
'tixi,oo,-euegy:iao~kge unte~rest ,costa, aind imports--were
Aw,are hait 80>ercent, of the inflatiob during -the- last
f:1 -nmts:of ho ye& osptothe fact thdt :they: comaprise only 41,,
.~ ~ ~ ~ ~~~e fqqW.0th. e, oWent up at. a 17-percent rate,.eIergy
as at a 2 -ereni raeorbtgage miterest costsi at a 40-perceat
cod nd-fue ata 20- ercent rate., All
t:, ret, of'Uthei total bindexithereae tls
la fapervaie ifab, te CA1
r~di ti erent.

July- Jan.-- Juy- L liy Jn.
Dec. Junie Dee. Jt
1972 1973 4973- 1794 17

CP inflation--... 3. 7 &. 2 .04 125 1.6
food ----- ............. 4..9 23.1 17. 1 .3 1
CP energy ------------- 5.9 11.4 22.4 4&0 & &
CPIimortgage interests--- 7.4 -1.5 39.8 13
Imports. --------------- 3.2 4% 1
Residual ---------- 5 .........1 6 .. 7


F... ...... ........... 29.6 61. 4 41 i ti3i:i2&i1.iii
Enegy-- ------------- 9.9 & 2 1C. 0 207.21 A
Mortgage intrs ------- 7. 3 -. 7 It 2 4 .2
Imports-- --------- 53.8 31.1 9
Resdual. --------------- 19.9 427 5.9&6
Total CPI inflation- 100.0O 100.0O 100.0 10. 0AO0L0


Mortgags e intPeres1I fth -------------------- 0er8
Importr ---------------1------p----- - 04i4
angt Igi

e Residual ---------- -------- 59e4h1umo8epr
T o tal - - - - - --, - - - - - - --- ... ....

(a) The weigtgsg intearst IIIofth Table for derivd enry the iiotlg I6,
cotsefec itde oreltv importane ofoo thes fuectr in d kerivemr AN1Ih
inDeember 1974 Bas repoortedrby BLS. Tese weiht 44)r~ ove No :sa pf
topredr s unnevenly, aoti ndtex fhigurespind se onv bIand 1rfet
(b) ITheeegsndxih weightesu of 0048i the sepagerat e CoI non-fentsto

W'he imortaeitrscot index is derve Asilbl for 1972,hc so th0re it e
spefira t CPI index exludsing motgae itaberetadteetr.Puh:ki

P ~ ~ defat rs I prni le s hs woud isv a m ren
prerthe diiionde fosmperne
appear inoblem wihs theCIis tidxwiha the final cOttponetz
GNP oer pouthi e.i The weigh for food varieaped measr tp ifre ~ e0tsi
The nricrt inclder isltaailablet for 197kainO roeih a~ ~p
frtefrttotmpnosith bi

Cl" '11 vfl
make the division a simple one.;;
The prblem ith te CPIis tht thefinalcompoents ontai manyInter
mediate products. The CP~~~I fo odfrexml, esrs ea fo ris u
these prices include large costis forpakagng pocedn an tanporaton

17ated ihin h tahle"O food the tand-thlyenreis someires.,

son o beievethattheeothr facutorsiwere reposble re orepart softe yrecent in-e
On thep~lpr hand ofg ihse &aciptitors Otheormsuis ofpodciowyn, sor dqt
bbt.~~~~e of the inffation dl srpotdi bescrable aadnplc in th e resdua
,ly ,iltioE nary setos spec iid p i~x.~Sircum tanc
r~reimorimt ndeaedinte ommod since tuhe tabe onl mesurest mortgag

imgrcmefsa Costta..n
10oa4 te apoWfator is at inteabl prepres.enpot someioer oandedde
e~~~~~is Ro motao fthose factrs. Other stuieswhic iuorse othrdt
co ~ ~ ~ l cusr er ftoher ifatindescribed in the table.peoeo
A~~~~ iwISOnXLo all inusriie sectorsspeial Thrcumsancs,
C~~~~~la w hrae ftecmoitciwees rnqestion.se a tonstrcest wold

v in the Uo Satmjo wol food customer
g~te Y~mreas terdeand fosrv America fod he to oil tembiargon cut
of a mlqi U. instanrce of etroeu andespnvironmbental retrictions
cauedlowsu 'Caltostell atw aperiemium. rImpor preies soarecued,
p~~~~~dmn aor ql ymtraspiea orldwtide dhemanid St tes; atcean
u high rate.Tisba ued hpartly to the prsgrowng imprtace. ofi
Japanas a aw mterials custoer and partl totelerareo iphenrotenon
of~~~ a aSiutaeutbo natll indutraize eoomesi es.n Th bere wre-as
&-- and fsa olliciih er esponsesi to eeplce a
cos ~li ineret rtesientl oice the 0dSttsand aboad Interpoyest cots
in eaed atheFooderal d Resel 'teptied to hae~olt thae infleatioeb
ti It oth moner suspply.

ese pecal ircumste nArlance weerepnsbes fortbed up n th
fla on~~~ the UPninceted Sta ates nof 12x5periecscrc nrae eet.aThe&
J 'i pat by exes deausnd fnaor ma ouptishre Unte Sthsnfates;n-ces
de a worlwidecesnwhichtidreavily to th pressue on4 perices.Thisu
coinbnati of eents n woul thae ausde anhicchleationeen sthrable of.i
infl ~ ~ ~ ae f 1.iprcn in the UntdSaefeefdmsics demandhad bee thet
s j,-t~ by onetaryeand isca spolcis.Eve ifolthedsetolrse hadbgu
res qtd'Idean sffiinl the increaseB the raste of unemploymenflto
6 ]r~et,, ath re thasradn the fou pecnsathtprevaial edr, thespca
Ile% belo 14 pecnwhl nte inreasfted
level, The sizecia -ofcose

the: ecnmth total CIincreased at horwtee0;

firs6 mothof 174,the an increasedatn rate of 12.3 erentinal ectorTe
spe~~~~ on acosstl ercasin The abn ormall shiosare of resinflation-
pax ulaly nerg prceswhic inreaed a a ateof 4 pecen-bu
the rices of the 60 percent of the index, which had been stable until I'l~i

197 icreasd at rateof 11.6 pecent in th firs 6 moths f tha

ye Th infatio whih bean i specal, solaed sctor hadbegu
to sprmdto-the rst of--te econoy.-By th last hnf-of-197, infla
tioaryprs swpe wdesrea. Inthefou secialsetosth
iinflati rait,6ad falle below 4 percen, while n the ret of th
economy it was near 10 percent

.. ... ~~~~~ ~~~~~~~~~~~~~~ii,,,Ol iiiiiii" iii~' ii iiiii i i iiiiii iii iiiii iiiiiiii i

The extremely unbalanced ilature of the, inflation, pwitoay. in its
early stages, spports the conelusion that the f du
maiily to a e seial, factors. TInlation cause ,4yeic~sdas n "'C
activi ted .to proceed in a much more balbn say a0reas
whole range of goods and services. While the existence of pricescnrl
may have distorted normal relationships, there ;inmply was, no dutiocks
inflation in 1973 except in-those sectors whith hka secial~ptob
Further evidece thatthe inflation was Rot due "cess I e e
demand is found in the relation between inflation and'the of
utilization of capacity of the economy..
The following cha;'rt presents the history of inflatio 8nd Br dtq6aa pl
ment since 1954. Note that until 197-3, the unempoyin it rate and
inflation rate generally moved in opposite: directions:O rei that priod,,


---------- Unemployhet



'5 '5 10 2 6.6. 8?0 fr 1

Unmlomn -- 12 mot.oig-vrg f h nmlomta
*.-7'.~;;i;;;; ;
-rsr ** ~~ .rrrr~rrrrrrrrrrr~;_rrrrrr


2 *.. ,*, ..**.rr

.... .*


56 5 6 8 4 8, S T


Inflation --~ 12 monthmovin aveage 6 CPI
Unemnoymen --,,,,~,,~ 12~~~ month movine~; averazej of~ theB~;,,,:~,~ unemooymen te

the unemployment rate fell and the inflation rate increas.
1973, a different relationship has emerged. Inflation appeared
unemployment rate was not excessively low, and it continued

ices have reduced real purchasing power and forced cutbacks

ice controls of 1973-74 offer an alternative explanation of the
ed nature of the inflation, since it was worst in those sectors
re uncontrolled. But if the inflation had beendueto exces
one would have expected the unemployment rate to fall when
ion rate increased. The fact that since mid-1973 they both

flation since that time has been due to cost factors rather

s these higher prices caused production to fall, lower prices
about by direct gverment action can cause production to
While there remains a tradeoff between inflation and unem-
t, in the sense that general economic activity affects them in
directions, policies are available which can reduce both of
the ils at the same time.
balanced natureof the recent inflation suggests thatit was
cu by special cost factors rather than by excess demand. This
co on is also supported by the fact that this inflation was ac-
ad by high rather than low unemployment rates. Since reduc-
tose prices that are directly controlled by government should

ease, it should be expected that prices and unemployment can
costs. "i"

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1. The Prblm and Alernative Solutions

1976 AND 1977
More Amricans either lost or failed, to find opportunities to, earn
livmgs cmmesurate with their ability in 1975 than in any other year
since the depression of the 1930's.
In hefistquarter of the bicentennial year 7.6 percent of the form-
allr force was unemployed about 7.2 million individuals.
Anoter .9 illion people has dropped out of the formal labor force
becase heyfailed to find work and gave up the search. Although
A thre hs ben substantial improvement since the 8.9 percent u em-
ployent ecoded last spring, the unemployment at the end of this
year~~ *ilsil xeed that recorded in the depth of previous post-war
Tment rate for this year will be determined by the
fisal nd onta~ry policy set for fiscal 1976 and the Transition Quarter.
Mos foecater beieve that these policies will bring unemployment
downby one-alfpercentage point more (to 7.0 percent) during tha
couse f tis ear.L Most forecasters also predict that the unemploy-
men rae wlldecline moderately again during fiscal 1977 if Federal
expeditues nd revegnues are maintained at the current policy level.
Unde anycredible set of economic assumptions, unemhployment
willbe a unsually high levels for at least several years beyond 1977.
i The Coagessioeal Budget Office (CBO) has developed two economic.
pats uon hichk to base a -year budget projection.' The "slow-
grpth pah is more- optimistic than some priate forecasts and
proi'ds fr sstained growth rates that equal te best of the postwar
year. Te "ast-growth" path probably comes olose to the best that
coul beacheved under the most favorable conditions. The number
ummplyed nder these two outcomes axe shown below:

CB, at 1975 1976 1977 1978 1979 1980
Nunibe unempoyed:
Slo grwt (path B) ------- 7. 7 7. 2 7. 2 7. 0 6. 7 6. 4
as, ro t1 (path A) ------- 7.7, 7. 0 6. 2 5. 4 4. 9 C. 7
ttw~ grwh path B). ------- 84. 8 87.0O 89. 2 91. 7 94.0O 96. 2
goth (.ath A) ----------- 84.:8 87. 3 90. 6 93.8- 96. 6 99.0O
k~ftP*.4e Projections Fiftal Yeare 1977-81., Congressional Bud get Office,

The ideal solution to the unemployment problm setxcetea
economic climate in which all Americans of working g a elz
their full potential without creating inflationary labor shraes ie
the present state of the economy, thisideaslutioncano
achieved. A more realistic set of goals would be to-
(1) provide mostindividuals withan opportunity tous
in a mannier that would provde% ad equate *icmes n esn
able job satisfaction without creating ifainx ao
shortages; K
(2) establish education and training programs thatcud eeo

]0 BII Eiii,
and maintain the skills requiredin the labor
(3) enforce anti-discrimination laws and improve ifrato n
placement services so that there isa better
iii available opportunities and available humani
(4) provide, without reducing the incentive to see mlyet
iadequate income maintenance so that those
appropriate employment still can mainta
standard of living.
It is difficult to translate these broad goalsitospeci
unemployment rate targets. Most observers believe
ployment rate of 4.0 to 5.5 percent would satisfy thefisgolgve
the current labor market structure. However, even the hg ecn
unemployment rate probably canniot be achieved before17 n a
ndst be achieved by 1981 if the slow growth path -is chsndheeoe
a fif th goal must be added for the next few years, to be ahee y
() structuring Federal budgets in a way thatwill
appropriate response to the abnormally high nmlomn
that appears ievitable while enhancin the
meeting the first four goals as the econmbiy isrsoe ofl
A diversity of approaches to alleviate unemploymetudobel
will be used during the next 5 years. The basic policyqesi0 snt
which approach to use but 'rather what mix provides tl etoel
The most important approach, .and the one: withu' hc o
pproach can succeed in the long run,.. is to set ge
monetary policies that w~ill increase economic demand'ntr rv
sector. The Budget Committee must recommend overal pndn n
revenue targets to the full Senate on April 15. The Commteshudao
in&icate its economic goals and expectations to the Federal ewBad
Training, education, placement services, day caf6 r o4s
other programs to improve the pqatch between skil '.1, 'patm e
`ill be -important elemelts of th oto Ote 1!186iwtl p

on investment in high unemployment areas.

fewee ;o 3actNe 0aM.rMA1,NENgga-NCV, pr, oseys
onempoymen 01) a
a it t p ol a'ds of or
'ther A~i l, can hel rt n ot o dvin
c, togiriiams tp mavid amdito."fs

b-actimons baspeisg for other pur~eplyes.' The: Committee. must also~
thrn nidh inflationarsis of the Feeral stiupltiemta B denftsa
: 11wrowthFast? .. .
w e to recommea

_(F postimport andt decisionCongrssisac musmakeaot nm

Amnticica rhevene soharing, federall _fdinanedr publicie works pro

jets, an/r termmployment prrbgramost can diretl inocreally
the, 4 available emjooe b s iendrid tei U e Saes. e Com monsumer

,decide foer tooincludedfusnd fiorito these 'or m pubFirstCnc urrien
'Resolution (FCR)a,.: s

Nct only, aei alre of ths approah pllrobably necesarsy theye
most iontegrated ais partofatotal naotion al effort. F spnce for
'p I d vi

ey ~ ~ vi inocror.a rs income'.t manenancenot onypob ato dierae cp t
the teconomy ics whowthnes ptheirheffet i ofstby t ax incwu reasesco

reducin in'sedn for7 or 6her'a mrps Te Caommiteemus also
,er mind the68 inflaionaryrik"of ag very timulative bugtiand
thpourtenta thaorkers of makes havdere even thwrtin themaecnomic

i~~vage1 Grn.Prmtowth Hdowemn Fas dohetiso cre

Theet ol e mostiprtnreso prengless witufst maket aboutounem
ployet isd whethesr to adopat fsca. n oeayplce htW
'heodw fajor dgroth of asegrwhistheacnm vr-th net 5od yeatlrs.nlain
"Alarnj abu hetalthy economy etri I uies dce themsdsiabl iWfaytio
Sovlte nmlyen rbem.W ot ual ndscal

...aceptabe empoymet is eneraed. etherin reponseto~cosume

very different employment outcomes as 'Shown in Table 1.n~

TheCB slw rowh athwold eae 16 illonmor uem
ployed in'1978 or 6.3 million ore perso4-years of unemploymen
ovrte196-0peid h a wud hifit rwt at. ontn
discuragd. wrker maks th diferene evn moe drmati. Th
:diferene inthe umbr. e woud be2.1 illon, n 198' o 9.
iwi;6n-ye;;;r& ;;f;'. e ~l I=_ &44_Wl;;; p en ,od.. Mo:, cover ,;
S .W.~ dersta th '." F ast,,,~s,,;,,,,, I;;;il;l;; i

Ifeert tiiscretinlion woudhe l thel ofmi aftpoeruepomn
falsnored5 Thercn w~hethejrthi -gotalwer adichsievdon 190o <5
Thve pths, level would be oever., shighr.underuihe fsedmt
pthe I beausifloin:r wolrbiihesnkaleryar.M.evr

acelraes independently oa f nth level one unemploymentcnntb

many. And the r t mix of solutions to unemploy
,, ,,ii, @ ,@i: i ... i ........ .. ..... ......

upon who is unepod, and why.
Younger' workers, for example, have relatively high unmlomn
rates even when jobs are pentiful and suffer disproportoaeyfm
recession-inhduced uepomn.', Although workersbewnth
ags of 16 and 24 account f yabut 20 percentoftheciv
laor force, they accounted for aout 48 percent of tercsin
induced unemploymen et,between 1973 and 1974. As showni
fast growrth would provide 400' thouxsand more jobs forteeaesi
Niii i

1978 than would a slow growth path.

FIGURE 1.-Distribution of theivila r fr and reces
unemployment among age groups



ili4 *' 4 -*

N@r -
Per n tage of Recessi .
Un Uemployment 11913- 4)
T'A Y T rcntage o-h
Ladi For 97
,,, U1 .;177 F-T, T "rii

16-19 20 24 2S.34 35-44 45-54 SS-64 6 doe

Source: U.S. Departm ent of Labor, Bureau of Labor S8 tatial Le

I Recession-induced unempa 4loyment is oneW AWe by subtracngtisunmp
meant during eriowads of low ovrrnall unermployvment bout that: duigpo aD
high oerallunemplyment

Nowhtr wwsthbrd astsI e an all MAges have higher unddmploy-
metrates that:aido their b toa coiftrpap~s. durming-periods of both
lwand high unemployment. When the recent recession began, the
ueploy. ent rater among -nonwhite workers wag 4.3 percentage
points highher than that among white workers. It was 6.0 percentage
p t higher at the depth of the recession and 6.2 in the first quarter
as shown in Table 3. Fast growth would meain 350,000 mlore
or minorities in178 (able 2)

There is: direct correlation between levels of education and un-
emlyment.' In March 1975, the unemployment rate, for college
grdates was 2.9 pret while- the- rate for workers who had not
grduted from high school was 13.8 percent. MIe raite for al workers
wa).2 peen.3Ls educated workers also account for dispropor-
tioatey hghshares of recession-induced unemployment. Workersi in
manuactuing(for both durable and nondurable goods) and construc-
tionaccont or disproportionately -high shares of recession-induced
unempl .y e n

[Thousands of personal

1 I1977 1 7 197 1980

White _-, 2 3 9. 1 ....8 17 3 177.4.........
( ii i

Nowhite ------------ 107 36. 3 51. 548 51.
Whte ------------- 50. 0 183. 282. 314.9 30.2
Nowhite-. --------- 1&8 6. 115.2 150& 2 1X01

Nonwhtrue.. ----------- 1.7 5.4 & 8 12.0 14L 1
White --------------- -6. 4 -2.0 -2.6 5. 0 66.0
andPE :

Nonwhite____ & 7.. 26.4 45.4 5&8 3 60. 7
White --------------- 27. 2 95. 8 153. 7 182.9 187.38
Nonhie.....3. 0 16. 7 31.8 34.0O 26. 7
Whis........ '2 19. 6 M.6 14& 7 141. 8 116. 4
(25n-59) : .
Nonwhite ------------ 7.0O :34L 5 72. 8 1K0,9 132. 4
i79.6 379.0 6934 859.9 904.9
(60 and over):
Nonwhite -------- -.8 -3. 7 6. 9 -. 0 -10.5
White ------ ---- j, 63. 9 -120. 6 -76. 9 22. 6

npublshed Urban wIntitute data.

Vmthl Labor kewleto, Febrtir 1976. Not kasonalli adjusted&
Drived from Manpower Report of the President, April 1975.


.*sDemographics group 1913:1V 1975111 -:96.
A nl ................ ------------------....... -- 8 & 7 .
:;iiiil iii s

Adult males --- - - - - - - 3 1 :7. 5.
W.hite ---.------------------------....... ..9 6.4 7
Nonwhite 2 ----------------------- 5.5-,& 11. 8
Gap (nonwhite-white) --------- Z.2 6 54 5 8
Adult fem ales ------------- ---------------. 4. 8 4. 7.
W hidte.. . --- - -- -- 1 4. 3 7.9 6.
Nonwhite ---------------. ...., f 1 11..9 1 .
Gap (noPwhite-white)______..... --z -. 3.8 40 4L
Teenagers (16--19) ------------------------ 14. 6 .1'19. 4
hiie...Wh ite -- ---------- ----- ------ 12.9 1 1
o biteI---------. i--iiii .i - iiiiA 2& 5. 7 2ii

11 w h ite ............ ..........- ---......--- -4. 3 ` 8. 1 61

Seasoniallyr adjilsted qua ery rat6,, U.S. Department of Labor,Bueuo
Labor Statistics. --- -
2Negroand. other races owhom 89-ercent are Negro. See mlyet*
arningta:.. ctober" 1975 .9 I Departme nt of Labor, Bureau ofLao giiis
. 161.

.Unemployment among househbld heads. has inardedmd ramaial
.i..i.g th .. errti ieces Ii Jinuiary 1974,- 1-38 household
heads were uneipployed. B y. November 1975, thisjq= -1i rw
io ,80.,,00 Ovr* simil' tim6 .0Jriod' the un&m4
household heads increased from 2.9 to 5.6 percent..5(o-iue
"A otfel 'wh# 6 muer pl yin `it -can be causqdb pmero
fcors, icuding-
ye da i-offci demand that cause shole e
or furloughs
-lags between the time workr leave one .job. gad tetimete
find othfs;
structural Wabalance btwee the skill levels of y~ab worer
--&paitis etwen th g eorphiclocoations of beWiad h
homes of weirkers, and
sesoalimbilances betwee6A numbers of jobs and~mbr of
Taking the who'and why of uiiem'ployment together, it can ese
that not only does the, unemployment rat, vary Wmq
y zn; ,Plsg

gyoups, its causes vary among -kroutps. '1he'thonicall hiA g irn
>loyment rates of teenagers is due in part totheir lack of jo W
nd work ei e,
i U ui h
ii: i

IEiinii ;mr


@ p eiq, -na4N
"iiii~iii~iii 111,~ __T_ eV.
a npblsedBueu f abrSttitcsdaa


l ,, ..........

I- -i ii;ii 4
es U

seaponillI adjusted)

IT a


WA : tifi" Ished statists..
.@ ~ i i i i i i i i ,i ii iiiiiii iiiiiii ii iii i ,iiiiiiiiiiiiiiiiiiiiiii iiiiiiiii .................. .. M

of the jobs to which they have access, and in partto
Limte need for income. The highr unemploymentrtso es
educatd workers is associated with their disproporintemly
mentiini industries with hi.....h employm.en. variiabilt.Ee
they ae more likely to be subject t uilemploymettanbte
educaed workers. Workes~ -in mauatrngad ostuto r
more ulnerable to cyclically induce unemployenthnms
workes because of the cyclical volatility of demand forthernutis
Teuneven incidence of structural and c clieal unmlymn n
the vriety of economic and social factors that causeumpo en
cretea need for a wide range, of short- and long-termdrc eea
resposes to particular unemployment problemns. Oeseiicrsos
mustbe directed to the training and experence neesoftears
anothr to the income maintenance requirem ents ofamiis n
thid t prevent the social damage that arie fromlogtrunm
ployent of primary family workers.

I e "Direct Response ofofthe Federal B
AlFederal expenditure and revenue policies affetteleeso
empyment and unemploment. Defense and nondefense..

of goos and servi ces resuilth ijobs. And as long as thereaeumpod
resures, these jobs result., in turn, 'isnmore jobs thruhte fet
of hefiscal multilir Income assistance programs nres onue

expenitures and thi produces incr eases in employmet na iia
niiriiitax decreases and.. increases inflence consueran c'iii

expndtures which affect the level of emlyet h 4nyo
ta stimulus depends, of course, onthe amou
econoy and the degre o f monetary accommodation
Tale 4 categorizes var~ious Federal programs acco owhte
th atually create employm~ent oigortmnities ncras theply
a iityof workers by increasing skdis and facilitatigacstol
0 maket, or provide income assistance to uneplyedaiiviuab
ahset of programs represents a distinct responset mpomn
tons. In te aggregate these programs (and o i


re eset Federal employment policy.
Trfiscal 1977, the current policy estimate forthsporiac
se to unemployment is $41.7 billion in outlay
in axexpenditures. Approximately 43 percent of curretplcyo:y
.finnceprograms that improve employabiity; and 45 pecntopgrm
tha povide assgistance to the unemployed and 12 percenttrjcsta
increwe employment.' (see Table 5 and Figure 4.).
Teprograms included in Table; 4 vary consideralyWthire
sponsveness to the business cycle. Most programs tha rae mly
ment directly are the result of increases in unemplb?~i.'o x
tTeallocation is based on a very broad defWniionof progm.4t ire
emploability; it includes Federal aid to elementary, secodr "hge
eduaton (excluding research and general education id) aswl mnoe
tranin and vocational rehabilitation.

e:4. tunressepased. temporary stiunuu moue such as
Temporary Empoymedt'Assistance, Countercyclical Revenue Shar-
gandAccelerated Public Works. Virtually all programs that are
intededto- improve employability are less sensitive to changes in
employent. Spending for programs in the third categ ory, those
thatproide income for the, unemployed, vary directly with changes,
in eploment."
ost of loymet-related p ams will vary over the next 5
yersacordine. to the slieed with wic the economy recovers from
rret recsion. Tables 6 and 7 beow demonstrate-the impact on
costs inthe ument budget under "slow" and "fast" recovery
assmpions.' A' '-cmaion of the -two tables demonstrates there-
antial k b realized rom a faster rate of recovery
Oumulativ realized when the fast growth alternative (Path A) W
a edwith growth, B) oe to $8.5 billion between 197
and191.The lo's share of ths aviings result from reductions 4nh
unemployment compensation, which is much more sensitive to
ecoomi imrovmets thnmore stible expenditures for educationa
manowr, ocilservices' ad public works programs.


Pograms and policies aimed primarily at--
Providng incom
Creating Increasing the assistane to
oemployment "employability" un oyed
intrmets directly of wprkbrs individal

EeTempo Eduati Uneloyment
progams.emplo ment assistftne. compensation.-
assi ce.
Countere yelica1 Comprehensive Trade a~djustment
revenue sharing. manpower assistance-
Accelerated pblic Manpower train-
works. in -g and service
veterans. eduta-

.an nrerhablt-
Older Americans Vocational
emlymet rehabilitation.
Job opportunities
Tax~ ) policies... ------------- Tax subsidies for Tax exemption- of
eduation. unemployment,
WIN tax credits--
Tax deductions for
child care.

2 Fie-Yer Budget Projections, Fiscal 1977-1981, Congressional Budget Office,
Janary26,1976, p. 4.

il ii i iiililiiiill ~ i1";;"iii i;iiii iiiii iiiiiiiiiiiii
iii iiiiiiii~ iiiiiiiiiiiiiiiiiiiiii! "" '" ,,, iiiiii~iiii i!! 7 iii i 7 l;"l iiiiiii ii i !! i i i 7 i7 iiiiii"ii iiIiiiii ii 7 iii
iiiiiiiiiiiii iii;,i iiiiiii.iiii iliiiiii i ii
l iiIii""lii iiiii ==== ...;;;l"' isi
iii;"iiiiiliiiii ;iiiiiiiiiiiii; ;1iiii"""ii

5";""""' $5. Z"""

is Billion

Programs MeUeiioe
;:;i;iii'i;;ilii ; II i; ;iliii
;;iiiii;i ; ;=; iii,; ;i;ii

P rograms
:7::: @i @@iiii@ i

.............. . ......
~~~i; iii iiiiii i

iiiiiiiii iiiiii i iiii i iiiiii iiiiiiiiiiiiiiiiiiiiiiiiiiiii
i, iitii i i

!I( ?I~~~J ................. "=li i ii
ii i ,in ',, I~Ii ii i iiiiiii ii- !ii"i

@ @ i iii

;i iii~ i;;;;7 ,ii =====ii
~il~ ii li'
ii iiii ii iiii
iiiiiiii"" iii i iiii i i
iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii 1iii iliiiiiiiiiiiiii;iiiiiiiiiiiiiiii i ii iiiii

[Billions of dollars]

Programs and policies aimed primarily

Increasing icome
the assistance
Creatingr. to
employment aity unemployed
Clses of instruments directly of wres individuals

Expenitur program:
Teprary employment assist-
. . . . - - - - - - - 2 8 - - - - - - -
Cutroyalical revenue sharing$-- -------------
Accelerated public worksI ---- NA ----------------------
Oler mericans employment ---- I --------------
J bo portunities (EDA) --------. .5 -- - - -- - - -
Su m m r yo t h------------------ .5 - -- -- -- -

Elementar, seoondary, andt voaba
education ----------------------- 4 --------
Copehensive manpower assist-

Mapwer t~raining and services . . . .. .. ... 1. 5 ---------
Veterans education, training, and
re abiitation 2---- -- -- -- -- -- -- -- 4. 9 --- --- ---
Vocational rehabilitation. ----. - - - - 9 -- -- -
Unmpoyment compehnesaison 1 ---------------- 18. 8

Ttl expenditure program- 52 17. 7 1&. 8
Tax policies:. i l

Ta xmption for unemployment
com ensation -- - - - - -- -- - - - 2. 8

Tol tax policies -2.1 2.8

At CBOestimate of economy (Path B).
CBO esimate.
Include in Second Concurrent Resolution but not enacted.
4 Derived from JCIRT (e).
*Les thn $50,000,000.
NA-Not available.
Xo~z: umbers may not add to totals due to rounding.

Table:' ge411R~ar WilOVA SMeat (PATO A).::. 1
......... .... F i cy ii .ea.r,-

--1976 lativeP
(est) 1977 1978 1979 1980 1981 1977-81

Creating employment directly' 5. 91 4.56 2. 8 2. 2 2.0O 2.0O 13. 5
| ,; ii,;;,;;;o,,

Incireasing the ieloyability

of 'workers 2__:- ---------- 1& 3 17. 8 18. 6 19.4 20. 3 21l. 97. 3
iiiiiiiiiiiiiiiiiii ,ii~ iii ii~iii "l~'iiiiiii i i ""

iiiiiProviding income..... assistance...................ii

to unemployed individuals 3_. 19. 8 15. 3 11.0O 9. 5 8. 9 9. 4 5t. 1
N N;iiN N i iii ii i ;

Includes funds from manpower programs- (pt. 504) for all yars, and smaller
amounts fromt countercyclical revenue sharin (pt 450):for fsctal year 19M-77
and from accelerated public woylts (pt. 450)..or ficlya 976 andthe Tranition
Quarter as specifie~d in- the UiS. Congress Secoad Concurrent Rbesutiodan the
Budget, fiscal year 1976. . .
2 Includes moniys from education (501, i502), manpower..(50. vocational
rehabilitation. (0), and veterans education, training, and rehabilitation (702).
Unemployment compensation (603) consistingisregular and extended beniefts,
Federal spupleenaetal benefits, -and special unemployment assistance.

[Billions of Dollars].

1976 lative
(est) 1977 1978 1797 1980 1981 1977-81

Creating employmient directlye 5.1I 5.72 4. 3 3. 9 & 6 3 3 .20.38
Incireasing the 'employability
of worker82 .. .. .. .. .. .. .. 18. 3 17. 7 18. 3 19. 1 19.7 20. 3, 95.1
Providing income assistance
to unemployed individuals3_ 19. 8 18. 8 18. 8 M8 2 16. 9 15. 3 88& 0

SIncludes funds from manpower programs (pt. 504) for all years, and smaller
amounts from countercyclical revenue sharing (pt. 450) for fiscal, year 1976-77
and from accelerated public works (pt.,450) for fiscal year 1976 and the Transition
Quarter as specified in the U.S. Congress Second Concurrent Resolution on the
Budget, fiscal year 1976.
Includes moneys from education (501, 506), manpower (504), vocational
rehabilitation (506), and veterans education, training, and rehabilitation (702) .
3 Unemplment ompensation (603) consisting of regular and extended benefits,
Federal supplemental benefits, and special unemployment assistance.


.. .lin n mpoeid do seti c r l
iii '= '' iilii), "= ==' ,iiii iiii ) = "iii)i,=,=,, ,,,
,,,,,, ,,,,,,,,,,,
Manydd rpoedresponses tounemploymentg inorlve a
i vm available eto wrs and

enhance th tiivso orkelrs hasin obecm nrainl ifcl
A. beIfuse oe cnsti ohenumber of jb tatcn be made

arli, thenenhacing the e bi ofoni
indvidu my nlymen hopcatl heao se wilrelaer antherloindividal

veninperod ofhihad d unemploy ment, hwvrsome jobs goa 5 yrleri
Whn fo t sl e dntiav essrsk ii or

subsatiai e jb nemlo yeand u d
durig th las.10yease becueof canghes bin te opoito of the ptsol
labor~ ~~47 force Inpriuate largehinceatse borna the numbe ofwrkin
Vnve-Al'uns, th teenagers of'tpcl have hiheilemloym enyto rtaes
than'househ9l0 head hamde cievems en ofv 4 orblean i5 percento
aiffiq. The d r eftetys h

wil b 2 yar od.Ths, te teeaNgers of 1975 wll be R rayttake


1965 1970 1975

Shd -...-.... 59.4 & 8 57.6
i'Maridme it ivspresent ---- 48.6 46.5 43.3
':Female houshol head ------------- NA 7. 9 8.9
Tengr 1619 - 7.8 8..8 9.5
W omen.. 20. a1 ............... )),)))-- 3 3 34L 35. .6
Household iiiii d 36.4 34L 7 39.1
Marid enwih ies present- 25. 5 24. 5 26.1
Feae oshodhads--------------- NA 69 &b 0
Wom n 0 a d ve -- -- --- ---- --- -- -- 30. 6 32. 7 33. 8
K-194ot available.

In fctmeaure unmployment may increase if training or the -availability
of aY-arefaclites ncrases the labor force without increasing the number of
72-678--76~n~l 111111 III ,

Teeage maynd ecome a smaller pll of the.. groupgtu m b td

~~iiii5~ i ii

incre ase inifemale paerticiaiinm is eixiii to ti ne. Id
to ellwhthe thevu geffeatiofnh rwngnme fwoe h r

permnenly iln ther lbor f ore add theeore shoul epoy eunemplo
men ratesrsmilare to meln inomprble cnoersul whnes-l ofse
theh efec ofnte wmprnen t -hare enterin horeeverin the labr frc
after anetneweiod ofrabse.ncte.rsthuepo
It is ll ea hghr thatnh epomntcexperienc -o sugecondtary walt
al i iffluerent fr om tha t of bn any ten

seekn emlomnt tonl durlbet taing schoaations. orme tdoh it
I t, few; year coul pro a p rpprtn to~;
school-ag chldbre soreeif empoyentony whenin schoolse axn seskm
The neesondsill reofvtersce groupsmute obet matched-wt joob0

portninvesifthe ioverallinemploymnt ratelistatonb oredd -toTo
levelsss of thervouse prgenratio.
i ii

Only r if neducat ocuion s abnd training proram fotrsilhataei

dI~ividual programs.

i iiiliiiiiiiiiiii

shrtsupl ill thepres bela not brdition tor eployet Manpower
trainngvpogras are pnotr likel tohe sucesfu wenhunempomn
is very igh.es unmpodetymen r ecees howenoslver, thenee the ma
skillsudgd fa ilunrease. ecarlwise, bot unempoyren asndhf
inflationn d ainin as an coiff er n mt hod af y
ment prgare anly to entvelop better trinngand-nfration suppont

forte enag ers im ns h o r
Thernextdfewuears wcouldtprold gronp of irundivytduals wideRfb
skillsof telbrfreifetv training progr"m .ne can M&poe moute

and ifeconomi R.,e lTeImato overycnbco ntedento Mproviderjb Por't
who ~hav omplete 1975).
Althouh 4enreent PogrmRpoto the jobs-opmentepotn ofth era

efetvnesformthose pograe ms.to h anoe eeo
programs i weerached inoa 1975 Ur evirtew t of o2frLagmente Octsof
various idividual rograms.
The rview uppors onl the roadst sots ofconclsinsabou
the ffecivenss o prorams (a)theyhaveenhaced he erni
power of traiees modestly;(b) they havenot solved al the problem
ofpepe hohvebenenole i heDogam' ad c te
cannt b juded ailues.Becase f diferg asiirptios, mon
the studis, d~eren data bass and diferig metods 'of rview, th

A~ te ~ss.Pfhi rvi te.author, concued tha ot:o aort
'(1) ~ ~ ~ ~ ~ mniu Thtann rga icesdtea age'apnalt toearnins o
[ l iiil;i;iii i i' "" iiiiiiiiiiii

42) lac mals.'benfite moe -ro.teqprogrmen) Athan di wiste
moe s by anaverage $350yea

me mnyeoewl Ip
contrasted with anavra eh inrae of250aearn fo ht

(3) BIot msom thes poram

cresinthir arnngpowr y gan average $55 per year.
Othr rseahestblihessoer geneayol comarisonsriuton cost sofci
fivenes~~ Amn oepor ms. h UndrsTtl Ihufdred Cof dllrensioe.
Eductionand rainngA tor exampe, hesearnings benf rits would
pecet Ifth ubidwee pad o

wer inresedby 40 to$80 pr yewlahre at a tpoga cos in olds5 the
$1,00 er nrolmet; reatiely gopodc return onte invesg btmet
Onhe the had, ob orp pogrmest under TtloerIVcofsth Actl
inceasd anua prnig f iditduls by0 ohily $200 toeae $400atd
cotne-ero drabak o hecocet s ha

Tranin enancs te vlueofa wporker to ahirm. Anotheer wayd tor
J..~~~~~~~~ prvd nep o netive hire to loer theens o abor to woul
ihi y. ne is~edutio inth saingsum wageeasaif heretained th
providee w-age subsidy.ar Hweer
If hor isa lmitd nmbr geof sis jobs thes inet ivs wil pronly
detemm'ewho ill~indwork nothow any eope wil beemplyed
whenthee ax vaantjobssuc as elierig mechadis
,a slbsidjor miimum ate rducton cold inreaseemploment
One os~biliy vouldbe pilt pogrm oflimted ugesubsdie fo
teenger to ry o bing owntheveryhig uneplomen rat intha
grou. Te anualwageof ful-tie emloye reeivngth miimu
wageis ow $,60. Te emloyr'spayrll ax cntrbuton fr scia
Secuityand nemloymnt ompesaton i no almst perent
In'ddtinothr rigebenfis igt osthudrdsof olar mre
A subsdy of$500 fr a yar to over hese finge enefit woul
R reuce h6 ffecive ageby 1 pecent If he ubsiy w er pai fo
the irstyearof e loyent or nwly ired16 t 19 earlolds th
costmigt b $0.illon.Aiaoherappoachwoud bto frgobot
emloe ad mloe cntiutos o oia scriyfo tefis
yearof a-tie tenae, eploent Theempoye's cst oul
then redcedby pproimaely$50 whle te tenaer oul
reeei theame tke hoe pay
It i dificut t estmat howmuc addtioal eplomentthi

smal susid' wold rodce. ne rawack o te cncep istha

ther ma be netv'fra mlyrt ieaf'nradfr

that mrits onsideation


able ton qmployes who nes.Aoase :hemrow a frce.w Ar~m ply'-iig
system has been tested in thedUnited States, oeven napltbss
Butin theory, the subsidy shouldgiveemployersire.
in order to limit the revenue loss, the credit could bephsdotve
1,8 monthsan the credit could appl ony to eploees ieiso
the average work force prior to the itoution of a a rdt
In such a system, the direct costs ofFederal support t h m
ployed woul1d be reduced and the psychological csts ofuepomn
to mniay workers and' their families could be elim'inatd Hoe'e h

lost revenues could be substantial.
'A third- alternative is to provide a sudidy for creatina.shrewok
woeek, thereby spreading the burden 9juemploymen orwdq.T
some European couintries, compensation is paid to w'6kr hwr
4 days a week. Other approaches to increase labor freprtcpto
or ease the transition from school to work can'also becnsdre.I
is important to reco ze, however, that the will not
iiunless the demand or lao in ie

,Therard~e totypes of incbome maintenance pro rm~fir ~
rteirementan disabilitfyi prorrils. .One is unemliyn ndthnj~~_
tion, a tempiiy payment basehdot *on need but 0 reii=si!i
experience and earnings. The second is welfare-fooddsansFC
M~dedicai, and other semi-pgermanent .income maintenac r. gas
based mainly on ned not on emp)loyment experiene. Soefmle
or' individuals may be eligible for both types' t asitne
government mayIspend $199 to $231 billion for prog
the next 5 "years. (See Table 9)
Spending for nonh-retiremenit income transfer prorm -tues
during the business cycle partial1 ffsetting swing n.eo mi
activity and individual tincome. WE W estimates 35pren'mr
beneficiaries and (because the benefit per persbti for onprgas
increases with reduced incomes) a 71'-percent higher cotfo yfial
sensitive transfer programs in the fourth quarter of.17 ecu o
Several mr ajor concernshave been voiced w thr
-Is the patchwork of income support 'programsal' aet
provide a decent standard of living for those whoc]o ok
-Do the programs provide equal treatment to toei iia
-Does 'income maintenance create disincentives to wr?
The circumstances of 1975 added one further-questin
-can State and local governments in areas of high u pomn
maintain the fiscal capacity to -shoulder theishrofts
income maintenance burden?
HEW Technical Analysis Paper No. 7 "The Cyclical B

Transfer rograms: A Case Study of the` Cburrent Recession."
iii~iii~iiIi"'i N
H i i iiii .. ................ i iii ...

iii ,x ,~, ii
Ii ............. ..................

[In billiosUdralldars]


1976 1977 1978 1979 1980 1981 19778

uppemntl enfis---3. 5 2.5 -0.6 0.38 0.2 O 0 2 3. 8
Regla 16. 4 13.& 10. 8 9. 6 9.2 9. 7 53. 1
Public ~ ~ ~ asitac (AD)-- 6. 4 7. 1 7.6 8.&3 &9 38. 3
Foo samp ----------- 5. 9 6. 5 7. 4 8.3 9. 6 10.90 42. 7
Cil ntrtonan ohr oo- f. 3.3 3.5 38 4.1 4.4 25.1
Houin asisanc --------2. 6 3. 1 3. 9 5. 1 6. 6 8. 1 26. 8
Medcad ------------- 2. 1 2. 4 2. 6 3.0 3).3 3.6 17.0O
Subotl, at A ----39.0 38. 0 35.9 37.72 41. 3 45. 8 198. 7

Supkmnt enfis'--16. 1. 16.5& 16.1 15. 8 15.0 79. 5
R euta prgras ----- .5 .1 2. 9 2. 7 1. 7 0. 8 11. 2
Pi~li asitace(ADC --- 58 6.5 7. 0 7.5 8.0O 8.64 37.68
Poo sams ---------- 59 6.7 7. 5 & 5 9. 4 10. 4 42. 5
Chid utitonan ohe fod 2. 7 3.4A 3.68 3.9 4. 1 4L 3 19. 3
Hosig ssstmt,&------- 2.6 3. 1 3. 9 51 6. 5 8.0O 26. 6
Medcai --------- ----- 2. 1 24 2.6 3 .0 3 2 3.5 11. 7
Subotl PthB ---- 39.0O 41. 3 44.0O 46. 8 4&. 7 50.6 231.4

Path APath --------- 3. & 1. 9.1 7.4 4.8 --------
Cu~uatvedifrece--------me 3.3 11. & 20.5 27.9 32.7 --------

Calidsed romdat spplied in CBO, "Staff Workbag IPaper for 5-Year
'N~hle hes proram ai mostly employable individuals or family heads,
somerecpiets re ncaaciated and unable to work. Also, some able-bodied
pi#6ts mst are or yungchildren if adequate child care is not available.
Thee'otlas a on-forth of the Federal share of medicaid; the remainder
4a pen fr te aec blnd,. nd disabled.

Manyperons esiateto look for work or accept a job if the take-
hom pa--slar ne ofwork expenses, taxes, and the loss of income
'maitenncebenfit-istoo low. For example, the earnings limit
W c islikedtosocalsecurity payments discourages employment
-totheeldrlywhie lak of day-care facilities and the cost of those

61,Jiempomet 'c mpesation and welfare programs may reduce
-wor efortbecase eneits are reduced as income rises.
In srecase', eduing the disincentives may inorease, measured
vwnplyment Urim a receslsioL ]Removal of the &iincentives,
)wwiii wa e 1a; lea addition to the social welfare *ncee high

iiiii~~ i iii@ iiii

extendedii! ........... ofdiiiiit 'm y'io nceae: nesue u em lo
iixi;"iii'""Oisiiiiiiiii i

mested Some proswould ha op ebout., (of th abor foceifjo'eac
wasnthe hacndiiosrn for byeim t udthInempoyets copesaio.
Emore seious concen isapossbl oreluctanae toaeptepomn
unles fcajo would proidget n substantilymrtaeh e payi than
unepproymente compensaihon. The iaplopsibnty tohatuepomn
compenstion many.beta.dte.untemptomntavgoosuseracho ok s-n
rasnd fodralh oanm~sthav ben' relutaned to rnewth adiioal16
weekgextesion ofainsurance ipaurent.Adlentieiomk unem-lyen
tesedlonged wouldh lave to b ot or nlnepoed to. collect)nfis
ratper t ahan is ance, a or. byillidig theias(see.48

Thdefsal 1977. T bu-dgexit-aon ah curret-policy bai-oldrqie

iiiiiiiiq i ~1 8
Ci entl, mi uiie e emlo nte r
asFedemorealelashae been I e xtendedtor aml
proebyms inrtateswhereiemployment has ben -atd


iiiiiiiii iiiiiii iiiiiiiiiiiiiiiiiiiiii iiiiiiiiiiiiiiiii i iiiii ...............................................
prodfronge Suc l~oan iees unoalde $85ileerlnn AfSupl :196adits
anticipated -tat. an additional $7.6illio inemloamnswl-ergndi
fiscmadl 1977.lee Ad wnisrato has proo s eed ai-noto nun

ple ment insurac taxes to eilimninate cal trstfnddfiif`.h.
posed inres in h iy nillrax, hoevMerfiincrandbrcot n

teeyiees.uemployeet and the inflaouo Srate.,u osm ln
Th masesuivec to ocial t whcu ich.. ac icompaid th.t1747
eot 1 teriefi ofr thbec tomneithern unsirie ljbllt
.rcssoredtlanex bdsean-, n 0prcn*d
(Flos fprogean Ienefdits ar-Seciale into acoyumnt, A4twc 1'Hol
Ywas made 4Vertatle fid.kr ~o.wr nt ifil 6#tdb
ueployed. n the cseofance employesaed hoisto -h dylcll -tr-por
inldn .2r an nalsis of thi itsesee ate-hen s.ame:n' lee.a ht'f fe?
ployment insurance, is $1.3billiorh" nd hening fica176

ii~iii iiiiiiiiiiiip;iii
iiiiiiiiiiii i ii
_,,,,,, .Io i l

Papers of EnomipyAc ivuih t7:,pp 13-6. o M
60h Im67pertacent of, themporary Lgrosfs:A Empricaly Wa eo aufc
empleoyees Broing thevrious Saeut,.mA'1d.H~*6;-ic
wae are subjpet f toursocialhi sectrio 4r bd inome taCB hhlighl

6f'wbik, t )enefsidts ena~ble thet empiloyee to support hislihousehld a
iiedi ii suiiiih timeas iiiiiis employer issues aiecall ;:iiiiiie
erc i iiiici that 50 percen;t of all workers drawing iemiil

a.neet in-surthn.66 ultCim"tely return to work at the same job wih th
ae empbyver.In the case of an employee on indefinite Iayoff, the .
pa ent if benefits alows for a more intense and prodti i
'9air-ah.,T- fe'extent, that such a search goes on, the mobility of lao
is enha ncd as a direct result of the unempdlo mert benebfits provded
SIn addition, the current system of .unemployinent insurance affct
tottinatIna f yedndirectly bi hielpingt6 maIntain the lee
of consmer purhasig power during periods of recession and high
upemploynmen 'It has I een estimated th t the system indiretl
C.Sippprts &50,000 to-..1 million workers which, in effect, means ta
it rate ould'be'about one i 1r
nit er mathouit the phrchas-m'g power represented by unemploymen
WitAll. of its advantages,, the unemployment insurance prgram
iis otb esin to 80tve one important fuAction---mereassmgth
etm 14 ab ihtY of wor-ker who is dra~wing benefits.
Ar'atdrnativ0 to, a simple extension of the current system o
Gifb p olomgg~nt"'eom pensation might. shift the emphasis of Federa

1 iiiiii iii
e the emI bi~~lity

iyeitf from- incoin:e maintenance to increasing th e loy a
'yj ace a wo in a inin

Of the. Onepdssilbility s to plac aorker i tra i
pi* m aftei* s6ib: Jimnited 'ime'on unemployment compensato
26 eekkJ. If fheb undrmp 10 0 articipated in a retrainin t),fot
am`ft wo P61titve purpose whui be served: .
en wul o&d recipients with an- opportnt
to isW P and,wgreaseboth their potential for emply
d *irange, job. choices.
wonjld gepera~tdqemplo~yment dir'ectly -fo those
erograms. .
If ~shwevor the' 6rkr ai s ;6mywaiiting to be recalled to his 41d job, h
pxt rd ditrashidg w~td be wasted. 7.
U ioubedy many persons would accept paid training inli
Unrp mneit coiiiphiigitioin &2) the 'opiion w-as availabled Makn
tligipr) employstent, a requirement f or, continued compenation
d~wsy 12 !weeks, is clearly. another matter. Whether the reducto
b ~ ~ ~ 'o alu~fr.hksld resher forego unemployment compn-
isati tkao -dnderftake' 'rmitig -is either appropriate or worthth
im cange in sadigcpln6tpob~lenls is a matter of judgment. t
The current unemployment insurance system falls to differentit
smong thexunem.Oloyed on the basis.,of need. To the'extent that-u
dumployed individ~uals vere, previously employN Ied at high salaes
Isae e _lyed spouses, or have substanilcurn incm
lavstenhbenefits, ufi less important to sustain! income levels ort
'Jtle lnpotane:4Tetiporry ayofs:An mpiica
AA&W- t19

will reduce fiscal 1976 revenues by aFn estimated$.3blinad "
.1977 revenueas biy $2.9 billion.. faxing these beneiswud.ices
the tax burdens only of those taxpayers with substata noedrn
the year from sources other than unemployment1bnft.Th eutn
increase in Federal revelnues could be returned to uepomn ee
fit recipients oni the basisi of need.
In addition to the receipt of unemployment benefits, a numb& of
those who work at low wae levels or who are sbett xedd
periods of joblessness alsio qualify to receive welaepy nt ith
form of Aid to Families with' Dependent Chilrn(FCfo
stamps, and Medicaid. Like unemployment copnaiote
income transfers are designed to maintain incmbtulk n
employment compensation, they are unrelated toepymnexri
ence and are not financed by contributory trust funs
While it is impossible to quantify the cost of h bveporm
which represent income subsidies secifically to th np-oe or
it is possible to quantify and forecast the spill-vripc n
employment on expienditures in tese welf-areprgas nuil
high levels of unemploym ent during fiscal 1976 axeepce t ices
expenditures in AFD over and above ths whihwud aebe
incurred h1ad full employment been achieed.ThDeatnto
Htealth, Education and, W lfare (HIEW) a siaedta FC
outlays associated with the recessioni willexed$.bilo.Qta
figure, the Federal share will equal $2. bhillion(5prcn fth oa
Federal share). The HIEW figures were predicaed na nmly
ment rate of 8.7 percent actual versus a full epomntmeo
percent, or approxnnately $1 billion per percentagepit
The current high level of unemployment will resl na nraei
expenditures for food stamps du ing fiscal 1976 f 4rma $
billion over the full employment ef. Additionaloulyinfsa197
given an. extension, of unemployment benefits andSUsolrec
$0.9 billion in excess of outlays associated with -ecntlvlo
Medicaid expenditures, of which the Federal saeseult,5
percent, aleso are responsive to yeclical fluctuationinepynm.T
the extent, that prolonged periods of unemplovmen euti nrs
eligibility for AFDC and other prograt S, Me idexedia f
1xpc1e 1to increase by $1.1 billion in fscail 196a bAnox
iiii ,i

amount. in fiscal 1977 nassminge the CRO unermplyetrtensm
tion to be correct.
Regardless of the ultimate disposition of anydemtsol h
handling of unemployment compensation and sociA:.f
assistance, the Committee must, refleetC the ex -ino
iii iaiiii.N

of these pograms atcurrent levels i'. the Firs .
Special unemployment Assistance (SUA), esi
II of P.L. 93-567, terminae December 31, 19T6 b.eQ ,m)
nlementary Benefit (FSB) progeram which exten iiiiiiiiii


iiiiiiiiiiiiiiiiiiiiiiiii .......... ;~i ii

i i i; ,iii;iiii;liiiiiiiii;,iiiiii ii sii
iiiiiiiiiiiiiio;;iiiiiii n


iiiii ........; s;;;;;;;;ii;;;

'" ii iiiililiiiiiiiiii

'torE Deppy end omenst ldion (and. 39 ndek foor specalcmpe nsahe
tion expires of 317Cnseq unde epoently, theCommitteespein
taxwe benefits recocmmeed eite ith exten termination. thos

Termintiont wouldemducdeotasb 14blinfr unemploymentinuae.
compesatid rand $1 billonfori speciryalsoopenasbtion.ia Suh teplica
'Pmiie wthurependet Cheildren (AFDoC) tander food stamploas. Inth
event thtble ex(t.nsion of benefiidtrsdcuindei unemrploymentinuac
odth" ewbefkneis abssoctiatl s oed with S epedures temiatd thoe
Statess Mwicun itemloyent themaine higwh wosuldto revertto ain
Mee pamet system unde unempblloymentainsuance.f$.1bllo
The ssued ratenofeconomic reover also bihassbtata in98wencmplica-
tios orfuur costs trndes ininome hotrasfr fo adamptonsyamles.As
indcatd igTalyue 9o (p.45),thenmore rapidbleductiontinelemployme ant
assme inth "fast growth" plarnth (Pauth A) oredue out-yarco~s the
for heseprogamhs sullseantiallyri as opxd witho expnditresouc forktet
-same h -prgr msindrttee "uslo groewth"pthr (Pth B).mn L hargl due
to edutiosp inlentroeoe the feast growthassymeptionsurnesultxen

with prga ostsy underoc slo growrmth assuptirons. Cumulativ
wmngs over therful antiar perid usan .tovu $ha2.7 bilo.Svngs peaki
H2~~~ inrk 199lxrl u ogreductyion ligibloe clientele whodaresdradwn
back ino tereornsmicn mainhtrneamsie. Savnsdclin aro tert 1979
economyapproachers full aeeprecn huemployment. anHaoradreore akt
0 Fina~l e the Commitere must deie whether nton raeommnd tha thue
Senat accptten proosd supincease i rn unemployent inuancetaxesu
or soeoltrnaie. mlyd sr

-directly: puliogrks, alsn avten pi-da rt-ecession rvneahrngry pbi
elonetEaue theaii s. advancutagescand rl dsvatages. ie ase
S4). Pulcn work prorawns typiraclslyt produc usefu prourchts-roandsh
buildm~sfirports anrd othelrly projesstis. Such projectsessprloyb
,am bebefore thee wedorkr mustceaid ftiullunio wa agssed.ecus
expensie equipment cand suples alsoidxed requeired, the cight of suhe x
]p aas er orke epoye isg une elativenly Fihningh. nberce
before plan can be dan compntratet, and lan purchyarsedanrid the
The.'" problem.can be avoidedespecially in ight of the ex

Vbieh vmiployment wil certainly exceed desirable levels. (This is
theresricion. of Title 10 of Public Law 93-567; Public Works and
.W~btic evellopment Adt.)
(2) A e 4d dvirect employmexnt program is anti-cyclcl revenue
s.A~iz~w, he pur'oose in thfs approach is to moderate recession-caused

deicits of State and local goyvernt andteey4vit4o
t is sector. Thisi program.... has 7th.........ni.. aes eli..............

.............. ii ii i
rs. The ne cost to the Federal gov
s; the monies can be directed to th
nd; and the moneys only flow whe

m ,,,,, .....,;li '
( Public employment is & ird eIa es
et cost per job created, especialy i
unemployment compensation or welfare h igs dabc s h
administrative difficulty of effectielyusnth apeumrsf
persons involved and the concern that th rga 1f edmrlz
,ig to workers anid observers if the prga eeirae nola
rking or other makework. The other draW~c stepsiiitta
public employment workers will only diplaerglrpbi m y
and produce no net gain *in employment
However, properly designed and im e d
ent can partially meet oth


ii ii iiii~ii;is
rp income for familes most
-fa large portion of the income maintenanepormcnb civd
Moreover, by including some training, h uueepoaiiyo
ese individuals can be enhanced

Compared to ;; a tax cut public emplopoieulj
inaddition to the private sector positions rae h iclsiuu
and thus provide more total jobs per dla fM rls~nig
Because public employment is likely tobetefcsosomchdae
and because there are so mayvariatiosnthtemi's.ap-
piate to consider this suibject further.
Public employment is frequently prose sargmthtWl
maintain and improve skills, accomls atoaicm upr
gals for a large portion of the uepoe ouain u rd
more jobs per dollar than any alternaiepormOntethrad,
public employment has been criticized sifainrannpo
ductive form of Federal spending, and asapormttonyelcs
reglar local government workers with trsothFeripyol
leavig overall unemployment rates unchngd
It is possible -to design a public employenprgathtwl.me
ay one of the objectives or any of thecrtissnedaoHw-
eer, no single program can be a papaefr l nmlomn o
can any justify all- the criticism simulaeul.Ee an n
crticism must 'be evaluated in tersof a: ccpoga eino
caracteristics. The following characteritc.aemprn.
Is the program primarily a respnse otercsiwadi h
trget group, therefore, coinposedof
employed; or is the intent 6f the program o6ag h okepn
ece of those who are chronically. unemlydruiwmly
10 Temporary Measures to Stimulate Emnplo yi0
naives. Congressional Budget. Office, Sept. 21.11 Ae 59OV Qp
res te iptflh r iu


Aa76' to be,& im ited numb of p; s or

whoh ave ia '88 their-unmeployment cmpensationi, or at ran-
dom)? I hep. is to be a -guarantee, sha~ll it apply to everyone, only

: ....; i !
i, or to family heads?,

xm i ii is | si
y be similar to other jobsin gorment, equal to what
tt made previously, 6r less? Should positions be permanent
-orcor'a limited periodsuch as 12 months?
If th-0 -rpos'e of the job is to maintain the income, skills, and
,dinit~of7te -unemployed during a period of recession, then there is
les ned ortraining although there will be a need to find useful tasks.
Theimpiedgoal of such jobs is. transition out of- anti-recession public
emplymen into work in the private sector. However, if the purpose
of hepro~tm is to help those chronically unemployed, then more
tranmg s equired. The transition in this case is more liely to be to
reglarpubic employment, although training for private employment

ea~~~ii~i lagpatofte rgrm

e ~ ~ I~~ work involve~ asitac in ongon puli actvii

dompared to the mai-ntenance of employmht
Withthee fie caracteristics in miind, alternative puiblic employ-
.1 ~ P In-tdggscn eealtated .in terms of the previously mentioned

The prijasy objective of trahinin programs is a* better ma~tch of
joboenins and A iso. Successful trainingrwithin public employment
progams hould reduce inflationary pressures as the economy
If ubicemployment is overly attractive, however, firms would be

iflate thir goffers in order to *nduce rkers to
r~tM td te private' sedtor. The inflationary effect of public em-
ployoti, tn be avoided if) the pay is low,6nough and/or the duration
Ai~t Auh, sad that job holders- will iretuirn to regular emiploy~ment
wh6ft op~tutoitiek, arise. A public: employmi~nt proga loill niot
W-h if. hwage i
ry, i h ago is lower than the e a2individual is
NOr wlli t, be inflAtionary
if~t*'dirati i' restricted to, say,'2 m onths. It iAclet, f'6r -oxample,
thttvt o~a0thhgb&&iorybotreina okrqiemt to
receve awae no greater thn urrent unemployment compensation.

. A n ii eal ................
Fialpbi mployment oswn o uldobe hmost inar ifd n it itree ih
joT necessary to design pubic......oii

i i i ................

men th programsto proiuedb thee employees amletme fo a evieso

oxth other wkservce acovitiesi
.Ano idealhee program desrn mi of por ms e wol asue thtubi

nance objective most efficiently would limit te mony o 'vrha

nd materials required to pduce a flrodt. H
gram intended to produce a useful product would hire re
wage construction workers for public works projects. Moeveiti
unlikely that the work produict of puli-epoymentdlar a
compare favorably to that from other public dolars., Othrietes
new activities would, have been funded before those acitesha
are already receiving public monies.
With a fixed amount of mnoney for: public employent rdeof
must be made between objectives for income- improveetitef
M~oney spent for training meaue either fewer jobs or lwrslre
for those employed.
Displacement has been a major criticism of recent pubi mly
ment programs. In somke casesi, State and local govermnshv
hired public employment workers, to displace, thos alea dyonIh
State and local payroll. In other cases, workers havebe li f
for some time required to qualify and then; rehired onte uli m
ployment program., The criticism has of ten; oere in asuigta
the money displaced has been: "lost" as an an ti-resion e,.e
However, the "lost" money acets as a disguised, and somewhtcus
anticyclical revenue sharing program for those governmens woh
used the funds in this way.
If the problem could not be solved in an the placmen
could be avoided completely by usmig the Federal POvnmena h
employer. A Federal program is, however, unnecdessayit porm
require State and local governments to maintainl theirefr nohr
The displacement problem can be moderated. to somexntb
providing some sort of employment guarantee even thog ur
antee creates its own problems. One is cost. A guarane ae
program open-ended and the cost high and uncontrollal.Tedfi
culty is compounded if the gnarantee inducea secondaryfaiywr.
ers to join the labor force. other problem with a guarneiswk
lmiciplmne, if the guarantee means that the sponsor muA oeteay
behavior. A problem of a different sort can arise if.teRa ee

tioal ncoe. For example, the guarantee might not apply to any-
-mily with income from other sources in excess of $5,000.
The iscplie problem could be solved if the Federal Government
only uaraneed to pay the salary of the applicant. The worker would
hav tocoform to the work rules of the sponsoring unit (govern-
ment r no-profit agency) in order to remain employed. This re-
qwould alleviate the major problem of managing this large
addtio toth work force in an effective way and producing a val-
uabe podut. However, antidiscrimination laws would have to be
vigrouly oliced. Finally, the work requirement problem could be
avoide if th pay (say $7,500 annually) exceeded support levels by
enoug so tat most of the unemployed would want to take the job.
cemployment program that was targeted on families in
nee woldincrease the direct employment but reduce the income
mainten e portion of the "direct response" to unemployment.*'--
addiionl fnds would also provide fiscal stimulus and create private
-sectorjobA billion dollar program could create over 100,000 public
jobsmorethan 25,000 private jobs, and add no more than $300 mil-
iodficit. An example of how the "direct response" budget
coud b rerogrammed from income maintenance to direct employ-
ied in the attached Appendix to this report
10"'ii; ;;;;;I;

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rof the bdet to unemployment reflects, for the
mos pat, sytemdeigned for, relatively full employmtent. Educa-
r ad tram'' t with the -expectation that bene-
ficarisWM-fid eplymrent, and be able to use the acquired skills.
Unemlqyvant nsuance is primanrily intendled for those who are on
.porar VIPporarily between jobs. At. relatively full
'i "ii ''' .... :; ,, ..... .... ,s ,,,, ,, ,li ,,,,,arj;, ; ~ i,"i '"

t-i o
ete unemployed are new entrants or re-entrants
ta te 14or orceandthe average duration of unemployment is less

l **
1e a recession, losers m up more of
a te duratio lengthens (See Ta A1) More-
uezplyament comppensation rise, le- h
opl dprivate ietent in training and, education

[ (Dollars in billans

erage Average Unep I loyment
uneploment duration compensation Job losers,
(pe t) (es) benefits pecet)

195 o 96---3. 8 9. 5 $2.7 338. 3
a 5 14.1 19.4. 4

1* iscl eaig 1660 ad iscadel year 197 estimasted.
2 Ainul aerae~ner yr period.
"Annual ~ ~ v aeaefr16-9. Dta in this ctegory not available prior to 1967.
Thedeph o th 1.74-75. recession led to a strengtheningr of the
dirct esons tounmployment *i "icome maintenance and to a
leserdegeein irctemployment programs, Unemployment com-
penstio wa exandd in coverage (via Supplementary Unemploy-
raen Assstane-SU) and duration (via Federal Supplemental
Beneits-SB).Reglar unemployment insurance benefits also
e~adedautintatialy. The number collecting benefits from State
insuanc proram dobled between September 1974 and April 1975.
Altho Cogres expanded direct employment programs with
J..thep'Mag: f lgilaton funding- 300,000 public employment posi-
tiosthe bgget.. ipat of unemployment on Federal expenditures

Thee v 9,ew ho :pect a quick retu'rn to 1973 levels of unemploy-
ment Curentpolcie describe a continauation of the strategy of
unh gdeped, for increasing employ ability, rel modest
incrasesin epenitres for direct employment, and continued

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primAx relanc onA aincomeA mainenne.(SeFiue 4 and Tale 6
aplodent insthurxt.nce purpose of thsmpendxeSt dsriea

leii iMorevi ithat is f ayom

liiiiiiriecitmpoyment and b taiu

Then vehicle forl decrbing afn alegrnatiestrtg sapbi
eploymeta progrmte.aprogeted on oueholsg wit ite :hrnoe

T arei differs, fo the current strteginwhch
edctionr unemploymneht comensation, nor pulitjbsards
tibuedortn t.Olhebaiofnee.I thee progreamtisveprleige,
the l funspovided forlirct employment ca, heefre plveo
unmloymen winesuor ance aokes a a fi meeting mion:Ma

eds geo ifict is t cocomponnt o f the pooi
emlymkent cane alsobl seoincras the empoyaildyo then
work fore. jb e olrta n t
P ublic emplymnth canost be vrabluaed inth bsrauajug
men o mt canhe mde ony bot, speeciic programs inaseiieoon
an o lir th a cn text Ae pe r og a f e i g w r er.i h r w g s h I
thyae lhikel to notbetain a oohe private eooyilcel emr
inltionary thanoe thiate does not. The sttnuzhzbsnes ycei
aloimportasnot. Onlywense, rie isrltvl ulempl oyetwl

federallyfinanced ublic empoyees be ikely to isplace oher Stale
andloaliorkr toraewresfo the private sector. ofinhelpubli'

the iud icit is the cnstrqait ton theat of en

mue thatrhe willingr til providethenpt c
>siaios unde eveage moste faorale be:pinsadte ltcl
500s000 to ullmtithe deictober s pino $7,500c beweaui rvt
1000hl-iejobs overn t5h50 arte yas
Th hoicehols notnbtwinin goodldrivat josanlasso-
puli0jb,00 butl-aimer whethe public jos6,000bceaedi
additio tollthepivae jobs. Witgh the mnumbeufunmlye x
stiultinfor tinelprivat hosectrofd thepulass saay(esnmly

Eiiility for thame jobbs will! be restricted to thiose whob vebe
on uneployment tor 15 weihir or whose family hag been nwefr
15 eek. Jobawill be distributed on the basis of losal uneilydnt
)))) )))))) iii ii
r itWitin lobal area, a certain proportion of jobs
geedonthose wh have exhausted their -anemployhment compnain
Househohiose i me fom sour other than une
compenation -orwelfare, eds $5O annual ($1,250it
sisniiiiio o ;iis

squarter) will be ligible. eanual incomel
be2 0for households without children. With thise ru o
person ro each householdt would be eligible. T
Spnors wouki he State and lool -governmental units o'opoi
unis. hese would, receive $20-001 a week to cover admnsrtv
cost an fringe. beiiefits for each enrollee in Ofass. A jobsanpro-
les for those, in the other categories.
Frige enefits and termg- would be as follows:
Enoles must leave'the programt after 12 months for a pro fa
leat 5 eeks daring, which time unemployineant compensainndo
welarewould resume. Emxployeem would bI exititlod to atcpt
inponsor's- health inrance plan but not the retip
The canges int the direct responsie budget would? bo ssoni
Tabe A2 if the following eassumptions are corrett:
( Tathe average enrollee in the Type A, C, and D
othelrise be reeeivihg $65 a week in unemplomntcm
penation. and food stamps.'

( That enrollee i Type B progrms would otheiseber
$150 pmr mtonath from the Federal Government o el r
and foo stamps.
Th hange in the diret response budget is sholm in TboA2
ty dolla was the average weekly xi ei nployrdent 18
payentin the first Y0 motian of 1975. The- benefit reamived bytt vrg
enrlle ould, however, be either above or belo9w tlids figui Eni Re eevn
U.I.payents are likely to be Imougehold heads receiving mode thnth Evrg
paymnt.As of January 1Alit, the maximum weekly benefit ranpdfo $0t
$139 Onan emoloymn t weightelid balsis, the average maxinium is 15 Amn
famiies ith an idiemlogyovd'hbiaehold head and income undier, $5,00,3 ecn
recivd ood smp.The diav e mbnthlY bonuste was $84 fei# famle iha
dh",L e rticipation rate ah averag
liklytobe hige fo poor falilies whereb thei liodsehold'.head avebe n
empoye for an extned pq 11. hese overestimates of thb net prga'oti
offet ecuse some aenrllegh wodiot be receiving U. I. benefi fthe af ed
ire familavid/o a exhausted their benefits for paor
heM $8 ~gg paym ent i1g co1Vibilant witl foloin brak
dow ofenrollees:C 35 peroernt receivingSW weelily'in cbnibineddnmlomn
comenstion and food stamipi; 40 petcent--redeiving $75 ibtiw~pomn com-
io; 10 pereetit, receiving $20 in foodstnp;adlpe
nothng t all.

37268-76 5
"ii''IB N

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N~~ 'N'N

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@ N '

!iii 0 ......... 1 & i :i .-:.
Costas pe jo ainso AFddto Reut iome 1n es r diin-ttsso
income toj b ing incotme.
Salary otal mintenace Num er of reation m aintienac ewdrc
Jobclssperyer er ea 2 $/r.fam>ymenrole TyeOjbudg ertonudwith cospdrt, Totaln jobs adcos
Tosn Di jons Biviounls with n odeipendents, workiin u

Aiiiiiiiiii - - - - iiiiiiiii i 5 0 iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii.iiiiiii

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The indirect effect of the additional Fderarl expenditures on the
private, economy will partially offset the net increase in the direct
repose budget. The increase in the deficit will be' less than $3.5

es and production in the private sector. The $3.5-billion increas in
the direct response budget is likely-tohaew "fi'scal multiplerd' of -1.5,
and t ase private GNPb $52 billion. The ad itional con-
me, Ovi tiehp nent by 126,000,'incr.easing
Federalre'vne by$.5b ihon and redcing unmlyment related
penditures by $200 million. Under these assumpons, a progrm
providing- -75 000 t' gedry ubiem ploymsent positions, Will add $1.8
bihn otedfct$,0 erpbi.jbo 210prjbi the

The e_2ect on State ao looa budgets will not be ,small litiher. The
eduction in welfare will save these jurisdictions 0.2 billion. More
importa-ntly,"the istimuluis "t'the, prvitet econoWY 1'llincreg'se" their
revenues and further lower welfare costs by anothe $0.6billion. In
Aotal, tlwoseviugs will, be $0.- bi ion, or over, a, $1,000 per employee,
if: the foregog assumptins are coect
The savings ,to' State and local aovernmhents are overstated to the
extent that sponsor8 are'require Eto contributet More than $1,000 per
job in administrative costs, fringe benefits, and training. The savirngs
are understated- (however- if there is any displacement of regular
workers by these new enrollees or if the reduction in the non-welf are
unemployment'saves these jrisdictions 'some money. Of course, if
here is displacement of regular workers then the net new jobs created
biy this, pgram is also overstated%
c; b ,i
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!! Arol m !i!ii
We have estimated how the net cost per Job would chanpge ffthe pbli
eployment program described 1n the 13udgit Committee stfr paW# enite,
haployment," wass thanjtd as follows-.
(1) The averagd annual wage ws achafiged from $6w8Z8 to $565O4.
(2) The dverage~ahnual cost per Job was changed from $7,733 to $7,,300.
The other assumptions r~wined unchangb N a fhAyt
(1) 32 ptattnt of the Job holders received only unemsploymert
compensation of $75 per week.
(2) 28 parctnt received ftod shaps of $20 per week in addition to
$5 weekly in unemployment compensation.
(3) 20 percent received $35 per week in food stamps and the federal
sare of welfare Qpaymnt'a
(4) 8 percent received only food stamps 'equal to $20 per mekb
iiiiiiiiiii iiii i'= i," sl === iiii ii iiiiii ;;;;;;;j

(5) The remaining 12 percent receive nothing from the.federal
The table below gives the cost for a mladlin jobs'prpgram. Both the .
drect and indirect costs are roughly proportioned to the number of positions,
th costs for programs of different sizes can be calculated easily. For
eample, a 700,000 Jobs program would have a gross* direct, and net
ist of $5.1 billion, $2.9 billion, and $1.5 bilIIII iiiiiiiiiiiiiii lion respectively; or a

300000 Jobs program would have a gross,, direct, and net cost of $2.2 billions,
$1.3 billion, and $0.7 billion respectively.

Gross Cost: I million x $7,300 i$7.3 billion

Less Income Maintenance Savings 3.1 billion
Equals Direct Cost $-4.2 billdon
Less Savings from Economic Stimulus
to Private Economy $2.0 billion
Equals Net Cost.$. billion
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1. nfrduln and Summary
hFdrahet rh"maintained( a roughly constant
20~~~~~ pretshrofGPin the postwrar period, State and local
m thaveed. thir share s gnificantly- 5 8.3
pct6o 15.3prn in 1075. An important source
stip ot fo thi pwh hs been ine-teasn Federaf grants-in-ald,
W~chha~ pow asa poporetion of both Federal and State andi
Idwexpn ute. Schgtants earteritiy orvor 600 in number and
fn o a and pe t in virtually every fuction,
ro~lec: he reaymi auig scale aind complexity ia Fefeeral-State-
fi tie relationships.

Iftim ]pesienia popmsal, and Significant Cogrssional
4titittidsrlih th- isca year 1911 budget a potehdtally key tale
(f"" thefutud tix of ftindist and spending responsibilities
#Mofg FeemlStae'adlocal gover=m6nts.

C~neal- evene s an' wh"reaches the end of its initial 5-year
tu ~ ~~ dlnaeemet-1196 and th aw Enfor-cemnet
Sa hso grant which has
bee, nwedwit moifiations twice and currently X e rs on
30,196,ar bth up for renewal. The Presi has
recomei" 'etenionof both, for 5 and" three-quarters; and 5
yeayesec~ivey, ithfunding levels somewhat blow those pro-


fourblok gant intheareas of health, education, social services,
andchid utrtin, ndto -phase out, 270,000 CETA public service
job adiniterd b Sttes and local grovernments. Spending reduc-
iioa 4'Affi~d iththe and other Tresidetitial reomwendations
ins to &ate and local governn mts by 13
pftviltbelw W~t~ pflicy level, tnd cut the doll"r amotnt of aid
(W-9f W t provided in fiscal year 1976 ($62.9 billioA
underr current polic y). d"'n
CMVWM]M on the Budet for fisoal year 1970.

,,1IIIiIt FI~I~ i~uli~ "

i ig~ i

i i""

The Public Works Employment Act of 1975, vetoed by the Preidn
and due for Congressional reconsideration, contains inno
proposals for countercyclical...'nanci0 assat e to t9,u4.
government.' At proposed a iwal = M~Ak' of 50i R*
$250 million for each -one-Jldfa sperce tiona
tagel :iat f tional. unemr

ployment above 6 pe'rcent,: coffater l-sis~ce-ouldpaou
$1 billion in fiscal year 1977 if unemployment averaged 7pecn
over the year. The Congress -is also- considering substitutesfoth
exclusion from Federal icome. taxation 9f interest on mn
This paper is an effort to put these individual budget decisionsi h
biroad context of evolving Federal-State-local fiscal and adminisrtv
relationships. The next section provides backg-ound informatono
existing State-local grant programs and on the President's fl ea
1977, grant proposal- Section III discusses .,objectives of z a
grants-m*-aid, and arguents for and against different objectivs
techniques. Section I resents individual fiscal yax'1977 M
issues in some detail. The concluding section exp lores' sever-al B6e
fuiturei directions for, ederal-State-local fisca3 and admiblikai.v
relations, and the sets of fiscal year '1977 spewiing decisions ,i
correspond to each. Directions considered are '(1) continue the goi
of Federal igrant.s toState and local goverqzpnIathoghprhp
not at recently experienced rates, with out major hne
XP in the mix or

structure of granits; (2) continue the trend~twi eue 6ie~
control over use of grant monys throug adptoofgerl va
sharing and block gatandam for redutoj ngrnto stabi
ation at existing dar s, either now or i as
of greater State-local sapending" exibi iV and (3) reducegera
and some categorical support for State and local governmentsan
federalize key nationii series to which those governmen 'preei
contribute. The concluiond is that spending decisions onsistn il
any of these directions can be made this year, and that th
ability of countercyclical assistanice prvdsthe flemibilit'y to koL'.h
desired directions withouxt beinihbte by the curfkn recesdn
induced strains on State-local budgt or getting locekd Mit6un
-anted permanent funding commititmenits. ountercyclial. assitac
also enhances national economic recovery by providing coar6&e
built-in stabilization across the pub lic sector.

11. Curent Programs and the President' Pmpods,
The estimated outlays of $62.9 billion for State0ocalaid, nfsa
1976 represent an increase in numbers of progame as, wellia.A
udgetar. sinificancen ovres the last decade- In 1966,thmen werem ee

Countercyclical assistance has recently repassed the Senate as part -o- 8
ihe Puh~li Works Employmeant And of 1076. 1%1s A6 4 WheiMatik~p*~ a th
ing mechanism and spreads the money more broadly.


ilsliii.0 -4 1 i-lIiI y e 1 9 7 7 o r;i

16. prcnt of totrF edera spending -(see Table 1). While Federal
grants avbeen inareasing as: a proportion of both Federal and State
andl loutIys, Federal control over the useof grant funds has
bee dclning duea to introduction of general revenue sharing and
shift fro categoricalto6 bloick grants. Categorical grants comprised
98 prcen of :FederaI assistance in 1966; by 1976 the proportion had
droped t 76 percent.
[Billions of dollars]

PiAogram type 1966' 19761, 19811

dnea astnce- .. .. .. 0. 2 7.7? 8. 3
Block-- -- 0 7.5 9.4
Paeg rca ga ts. ---------- -------- 2.8 41. 1 62. 1
Total- 130 62. 9 79. 8
t Feral outay er-

Cu tpoicy level.

State governments receive more dirct Federal grant unds than local
govenmets, although their share hras d'eclined from 88 percent in
196 to76percent in 1974. The. increase in the shaxe of loca govern-
'Metsis ately attributable to the $4 billion per year thyeceive
ftomredne sharing. However; State governments* reitnbt a
ir 0i

-tohoftheir F deard grant thtnds to local governmets.i 'Since no
ta are:avalable: on the extent of these Oass-throughs, a recise
det~inaton of the-ulti~nate distribution pf Federal funs is not

two or anti grant pi ns, Medicid and AF ranti
fudsttemn essence passe th rfg to individuals. I: the grant
prog~ ths fuds axe apt't by recipient governments to-prvide serv-
ics;f reample, scooln, a care, highways andt la norcement.
Ii ''p cses9, Sit'n loa l yer uents' are req e contribute
gund to thfedea,13 tu p rted activiR16s
centgh f a etra#outlays in each budget functo
accontedfor by grant programs 'is shown in the first three columns of

The disribution of total Federal-aid among the several functions
Ibte in the second three column -of Table 2. In 1974, icm

Elirecive te, most grant fun-ding However, the relative importance of
Aesefuncions, as well as of commerce and- transportation, has de-
creaed oer time. The shift toward general'purpose aid is shown by
ince-aing share of total grant outlays found *in- the revenue sharing

braut as.a percent Percentage

Function funtommn ucim
Fisca erFiclya
1968 19117 96I9117

050 Ntional defense. -0... .._ 0 0 0
150 Internationa li. 0 0 0 0 0
300 Natural resources' environment,
and energy.. 9 16 3 2 3 5
350 Agriculture. ------------- 12 14 2321
400 Commnerce and transportation-- 41 47 4 3 8 1
4,50 Community and regional devel-
opment. ---- - -- - - 73. 79 6870
.500 Education, training, employment,
and social services-.---------- 66 7 5 2 32
550 Healh--- ------ -- -- 28 3 3 1 61
,600 Income security -------------- 13 1 0 2 52
700 Veterans benefits....... ---------- 0
800 General government. 3 3 .0
850 Revenue sharing an general
purpose fiscal assistince. '. .95 9310 2 2 6

Source: Office of Mainagement an BudgetFdrllvmetFnne
(supplemental material to fscal year 1977 Budget)

In additin tFeera buge outays une rn rgas tt

sss e of anature toStte l
bond interest exlsin allows tt and oa oenet obro
at lower interest rates, but the reuting savig ote resta

without raLising net tax hurlens by. an equivlnamut

1976 0

.Tax expenditure 16.17

Exelusion of interest on 6tate and local debt-- L& t.
Deductability of noubusiness State "and toal in
owner-occupied housi7g)
Deductabitity, of property, taxes on ownier-oceopie.hm-1.7

Finally,~ ~ ~a Saeadlclbdtpoiions are 'afeted. cruoidallyoby
general ~ ~ ~ ~ en ecnmccniivudtu yth deredtak rof mne ovrlbsiuu
or estain whch edealoliythooes toe aprpltoe ctbhe ecomy.
Each ~ ~ ~ ~ ~~s ekr pecnaepitoenmlymredntabove fullempsoloyment
creates agpStaeg andlocal inopme and outays,

ranig emlomet ad social

as axreenusaloffomantciatden pleves wihreduceion ecnopubic
aducesion the impartofiunempl hi

and the fiancallystrppe pepleincrepose. Ifltonar bhe uinscis
alosta t categ, since theyincludino

increase ~ ~by ineetcsswheadslry dhemandsofpersonnehl, andi
price of urchsed oodsmoretha thyoor hlrevnue.

governm ~ ~ osas would reduce bt Federal spndngan nFdral
peren beowcurret pl bu testimates. Tabler4contrasouldtbe
hig .r o i y uss.p h e p o o e
Preidnt' rcomenaton wih urent, policybyprunction wouth
accont or pprximaely40 ercnt ofe ctbacks recomme nde byin
the resient.Howeer, ostofl thmtern proposedncu ntback provi
from he sae huanreourcs areas.uced reducin aore aederollgoan:

$1.6bilioninommuityandereginal developmednt, whreviouse
Presden omis'otlay execte asa reultof te Pbli

Works Eploymet Act f 1976

-$1.7 illio in helth, here fndingproposd forthe Fiancia
Assitanc forHealh Cae At islessthancurrnt plic
estiatesforthe-repacedcatgorial rogrmsincldin
_$1.0billon fr inome ecurty, herethe ropoed cild utri
tionbloc grnt i cofine to oorchilren
The resdents bockgran prposas wuldredue Fdera cotro
ever tateand ocalprogams.Reciientgovenmens wold b
ft*rto lloate undsto heirow,1 hih proriyuse, an th proose
elkn ination of matchm ~,:,,,,~,~, ,,,,,,;,, requirements in many programs would ~~ r ,,n~i,:~ ~x~i, ;l ,
furthr inreag Stae-loaJ dselltionoverthei spedingand axin
P~ttms. his reaer~fexiblitycoud men eficiecie in he povi

suppot. I coul als meanabanonmen yState andlocalties

of pogrms wichtheFedeal overmen intiatd. nd peviusl

Tabl 4nn.-FEDERAL ..GRA..T.-I.... 4 OULY BY FUNTIO
(d[Bidion) s of dolla

(Social ~~~ ~ CB sevie cnoldaii)den- 2.5
6 F0uInc tio n Presiidet' cre t1.0

budge policy resoure
( sl i ) tin L--

44 L 0 3. 4L8 51.

500 Nuatiora taianvingrepoymenxt d
anerd soia serices'.. ---- --- --- 1. 4 1 24.5 16 4 1 ..
(0 n Educating conspolidation) (3.-2).------.(3.3. (.1

(Socinal services consolid atin -- -- (.5)- --(. ) 1
550 He lth ---- --- ---- --- 7,. ------ 10.0. 10.2 10.2 1192.
(Health consolidation) -- -------- (9. 0 ------ (11.2) (22

(Ch ild nutriti co nsolid attion) ----- (e2.0)l-----(32)(12
adatinStubtotal heumans resourcles e f naa
and ~ an C ope e*ommnt an Rru e-t o n gis

300 Natuteral reoreenior (1)'andl pooS

men nrgy wi.h lit5 2.r 4L 6eea 1oto oe h
400egommerce andpotrforsportaicul-rS.- t-, oa 2c.0 8.6i.4i.
75n0 Lawpen orre boand justio--l 8 .8 .9.i8g0

SubtotENEaA phsial rsorcs n
lee a w eupportcmnt-------- 12.9 15.2 13. 15.5inui
Revenuseadilyavringandlenyeral putr-yoproi

NOTE.Number ecnmay nowtaddurn-fo roeunpeinhgcu

or specific fiscal cisfof exempera Assistance
and a 11Tn rconlstn of runnot fore andngainstvFeer

fundls stail vilbeyerafe eao prodcsppr n ie
ofgeealeonmc owtrnfr xmpe te uretreesin
or peifc fscl riss-orexapl, ew or Cty.Th bsi
aruetsfrcotnig uprtaeadilsraieeaead qiy


Therp areonorates. to be, realized from operating asi ngl,g rge-scale
tax ~st and shariag its proceeds, as opposed' to carrig ona
i~dltiudep9 gm'aller, competing svsipms.1 Furthermreth saxn
ruromote nationwide equahym public serviies by givi
r xas' more than their propo .rtional sharei of the revenues-
P~or~e mre than, the prtoportion contributed by their citizens. More-
over, inc the Federal tax mechanism, -aside from social security
taxe s mre '.progressive than the alternative State and local miechan-
is-,,, te ax buirden can also be distributed more equitably nation-
wid baedon ability to pay This nationafly sup~ported equity helps
poo arasachieve an adequate level of public services without
inceasng heii- own tax rates so high that they drive significant parts
of kr i~ e 'ady meager, tax base out .to better-off, lower tax areas.
The aipef 0ham~sms of continuing gener al support, axe (1) genearl
reveup sarig, and (2) tax expenditures such as Fed;eral income tax
deaudions~o non-business State and. local taxes and, exclusion of
intes,.onState and local bonds.
-P~dicsupport of two kinds has roeeied attention recently-
=bre~ssao gr-ants and assistance, to jurisdictions in fiscal crisis
T~e a'g'uents for periodic support axe the need for a nationally
coordnate' stabilization policy and, the, greater fiscal capacity of the
Ped~ral.Gvernment. With regard to stabilization, only the Federal
GQ've. met has *the ability to mitigate successfully swings in economi
actvit wiich affect the country as awhole. The greater fiscal capacity
OftheFeerol -Government assists it ,in~ meeting- this stabilization
res osi~lly, and also .allows it to assist smaller jurisdictions which
(xprienes eisme. fiscal strains. Failure, to help State and local
gov~mmets, weather individual crises or nationwide, recessions will
6f, ~n- ocWitate fiscal, responses by, lthem which 'undermine general
Dnk,(4..ta iliy and work against national economic recovery.
Ue~anlom; for' periodic general support include countercyclical
revnu, pning. and. non-recurring grants, loans or; loan guarantees
to." dictonss-oncrses.
Irgumets, against geliera support center principally on account-
"ilit. Stte4ocal governments whi'ch spend the money have it given
tothe. rther, than having to impose the necessary -taxation on their
own urlinitions-they may not be as careful spenders as they would
be~ifthad, to. raiset.he funds themselves. Citizens will be opposed
tolwepauive or inefficient spending, but, not as eaware or as opposed
as tey ould be if they were asked ,to *icease their own individual
vmto. py for it.Au extreme form of this accountability argument
bpj- tat, availability, of, bailoute aid to fiscall threatened jurisdic-
oward,'and ancourage mnismaknagement .

_f(A~crJ*~mn axgwnronent to. accountability snay that State and

Axo lck f.equitable sad growth responsive taxes, notably significant
incewom xton results. from. decisions by those jurisdic,
1pves, ad is nota, sufficient reason for Federal aid. Indeed,
a4local ,governments have irecent years been turning in,

eomtines hdvd: solnitimes- been overstated. They canhot be fully
rd~~dopleso ludividual. Stite. and local tomes are eliminated entirely, which
84A]aq th.c9bbtained partially, by piggybacking State and
.....a....e... on tW e I ed eraj rt ax F3 t ee
AJ emaa si?ejurs ctoup ow..do.

ahes t propotio of a hav d the 195
eleasiblerpw~ onsruneth l

hole enq apare the 611% Refiti f
Fed Naial Government'is sare re app t i1rh

hei tax.exp.ndituresihe formo
., ii;,;i""iiiiiii iiiiiiii iii'ii
1 .1 c W 1 0 )X_,,,,

and ocaltaxses paid, edthe Feeal Gov Sta
ifferenedmen curetl ftnocd wt

re reatieysil eyddhe
foSate and local governments to ra

visy people ysnet by tend ta
s tick are available tothr edperal Goermnto idcefrt
presnenb tate and econmcalitie ond thirowntx1eem

S...the....al G..rnmen.t isFede ral aidenrmarked..........fie
ethosel purpssSilvrocuwhnaIisdictions might not ch
cipiendtgrops, iunbleto capturen the fuleooi:aeio.18
execndituces.dI is thetinfore leikelyt

Trri ,B.Bad~itin mehaissfo c

ith m a rehingtrerstaementhwas r aduce w.t er po1nt .................
education deidamoie shothety and to e~mila whorrs h
idetif services. This innoatpure aproahe whcsur h~,-i6
othr tompedoSt(although Fpedegral spoti ton~tVM' '
deeniblemons rgroundg thatte larger ofepa Goenet sa
whoe cane wiAuethe fuin granets~o -sc xedtrs1adttr~r
t h y oe w hi m o viel r n mb e n m i s t a n a p r or i ae o r e f u d s o r t e n
Thvie nationdardlI purpssargument decinie ifeet
dacifrngo mosnt pofrten ocrwteh raespc oporm teda
parothicula chopuaicen Csubgroricsl eseillraslus hc
aore reativelytractlg wrrinelydsersdadntelofecnii

Statne and local govieinments mayprefernot to taxtheirsr
represented and economica~1111IIII~I8:,:lly n oitclywakta he a hv
diffiulty aptuing mch ofa shre ofexpeniturs forthemslve8

Aagu t eta clnderfeidiiand
Men., agamst cap a gmtizonern thAc t
e..(Acis of ea ref dm .vl fapatndhy at
to %de kntion of crgam naitiz
a_ oertfor governm D i occur wi

4StW n~dloaXoffcilalloctetvix own.l reve6s as to ma~ievmize

pwwx~ntcs o thouh olti.a apressure tolcaptue revory available
Yedeial ~ ~ ~ ~ nt dffk nfieceocubcausrherpeople wheo mae thoeh

~~~~~~~~nbeStates togtisporm mlmne h ayd itwantis, and murst
Mollo-t o stt3e ts fae oditly tal

often~~~~~ hiepc tfst oaterh reltivl fundsand to metet adreaJ-
.reortng, rquiemnts Tey lose fexiilt to joeatedr levelsio and
types~~~~~ sperie oterpatclrneesin d portoieprogra i fdi ndsar-
both~~~~~ ieea dteran-aseik chan eede occur The split
betwlm-' Doicvmakrs midnpogrm leveraasled to beusrck natiowie.
thq fow'er fame tehlater o patten omsentad-ing frmwatte ithe
f~~~r~~rica fo orplc eign, oeeti ton adiind, genderal revenue
and i thea rcei governmentsrc ber n

Respolases~ the Ueprbmsocategorical granotshvtned tybo gorant
for Wbek grai>ck Feerlzaintis thzemstwerves the fobjexampve i
to. istibut reourcs t uinividual blWtok derand the reliee nSimpte
ond~oc4,govrnrrkent ofth burhideno nutribtiongito land admnistrc--
Vig th reist'bued unseric E mixe are welares refor anud nappe
ti~~~~nalen healt insuraned Block grants arwpoosdern o e looen
their own spnigpirtewthmal oretlxiiiono tyt.pedn i

for exa~~~mple, cmuiydvlopmentforcjb-elaed education, and
governments inel esalihn spendn prueiorites such iniida cormu-
gram, whle etaiingbroa infuence oer he lvA ad mx ofpub

lic ervces nd romoinga miimu leel o ke serice natonwde.
Blc rnt hc d i ltmepter fsenigfomwa t

woul thewis beareideticl i effct o aditonalgenralrevoau

shax"Ag Thi wi1 bethecaseif he rceiing ovenmens cn b

ctedta seudmoreon be. ctiitie suportd byblok grnts

theamontof heblok aans temelvs. he, fr xamle
tbe. ederl GoernmiA ctE~bek te, lw enorceent lockgran

block grant area for example, law enforcem pntI""""O"" education'" Z andE

chil nutitin. I is esslikey tobe rue n aras uch s comun


7 4
ity development and employment and tr41i ng where the Fedpal
Government provides a substantial share of te dollars spen ive
th e complex-and at the moment 1arel Ai oa-atenb
block gran't pass-throughs to localities, it may be true tha even
limited Federal dollars are indeed the m rial dollars in sa 1 Cal
jurisdictions and are in fact helping to raise service levels ome
places. Also, it is often the case that some 'stings and pefoiane
standards axe applied to block grants-,for example, esieitiaI
proposals that all child nutrition moneys go to poor children.' These
requirements may be effective in influencmag State-local spending
patterns, but they do so, of course, to the extent that they partake of
the characteristics, and the rigidities, of categorical grants.
While. the e ffect on State and local spending pat~terns of moving to
block grants is .uncertain-and no doubt v'r different for different
States anid different functional areas-the basic premise of block grants
is clear. It is that less Federal control over the use 6f Federal'grant
funds is desirable aud .that States are expected and intended'to.use
thei new discretion to change their spending pttei. Why shdhid
the Federal Government favor this change? Fedteral spending "in areas
thate are pricipally State and local functions began in large part b.k
cause of concern that certain important services, especially servicese
poor and handicapped people, were not bemig equitably or adequat
provided. Moving back from this categorical -spendmig must me'k
eit her that Federal priorities have changed, or that they have not
chage 4but (1) States are now expected to support them voluntar-ily,
or ()categorical grants have proved to be inefficient. meows to
aheve them. It is important to dis tinguish these possibilities, If it I'S
tru that Federal, State and local, priorities now essentially c
eiterbecause Federal objectives have changed or because State a
iiiiiiiii iB

local orienitations have changed, then block grants may be ago
method of funding State and locally provided services, altoib
another answer would be to get the Federal Government out of M


grant business. However, if the problem is that Federal grants have
gotten out of hand in number and comxplexity as tools for achieving
distinctive Federal goals thenk the responsible answer is to weed out,
and improve he categorical programs rather than.to give the mone
to- someone else and let them decide what to do with it.

IV. Fiscal Year 1977 Budget Issues and Optiem
Geeral revenue sharing was fifstlenacted in 1.97,2..V 0r efurrent
1.awte program expires on Decembei: 1 1976. 0utl47 i)
$6.1 bilhionf; current .policy levels for 1977 W'ould be $6.6 xhot This
amounts to roughly. 21% percent of profected State-local revenues from
all'sourc'es. Funids are 1distributed to All 50: States andis'oe 39,000
s iiiiiiiiiiii! iiiii

;;; il;;;;liii,

local g es c n to a frua hi" tke ioAccount
population, tax effort, and. per Capita, income. Ldal goverq et
receive about two-thirds of the funds.'
The President has. *proposed renewal through 1982, wih fundig of
$6.5 billion in 1977 and an~nual inc'reas es of $140' inlin erefe
consistent with present law.
.; ,,,i;iii,
.,,,,,11,, ,,

Tevenu sharngcner oent Fitdertalcnrl ove srg S itate-oalsped.9hing

i uisicton cntribute. proporti -onately more4 than they receive, and
-porerone reeive proportionately 'More than. the~y contribute.
If he rogam. is to be renewed, the funding, level is an obvious
's e.he President's proposed an al increses of $150 million
wudflso of the roughly $400 million that would' needed to
'keepup wth epected inflation of about 5 to 7 percent. The impact on
Fedeal otlas, State-local revenues, and service levels depends on
the ombiatin of revenue sharing with all other grant .programs.
Fedeal utlys nd State-local revenues can be set at desired levels
-by arios mies of. different forms of aid. Increases or decreases in
Fedralconrolof State-local spending can be accomplished by shift-
ingfuns fomgeneral revenue sharing to more restricted forms of
grats r vceversa. Thus fundmin levels for general revenue sharing
in~vtabl for only one element mn an overall strategy of how much
-ifturposes, with what controls.
Sine gnerl revenue sharing funds are geerally unrestricted as
to ue ad ae sall compared to total spenin by recipient govern-
-mens, t i no posible to determine the actua effect of the program
,onStae-icalspending allocation among functions, recipients- etc.
-Therepoted ses of the funds may or may not correspond to the J
actal ncrmetal spending allocations induced by the program.
Thuswhilethe impact on jurisdictions is. generally known, the
impcts-onditribution of income and services among people are
Othr ssusless directly related to the size of the 1977 Federal
budgt inlude(1) restructuring the allocation formula, e.g., to in-
crese undngto cities where poverty or tax effort is hig, (2)
strngten ig rohibitions concerning discrimination, and (3) canging
thedurtio offorward entitlement.
In te pst ear, Congress has considered several strategies to com-
bat ecesion hich involve State and local governments. Congress
inceasd fndng for Title VI of the Comprehensive Employment
'TraningAct roviding a total of 310,000 public service jobs. In ad-
diton itpase the Public Works Employment (PWE) Act of 1975
incoporaing wo additional antirecession programs: Title I au-
thorzed$2.5bilion for a program of accelerated public works. Title
II eprseneda new apprcach; Congress authorized an antirecession
gran proramwhich would distribute funds whenever national un-
emplymet eceeds 6 percent. Recipients would be limited to gov-
ernmnts ardst hit by recession. The funds could be used to insure
the aintnane of basic public services.
The Pblic orks Employment bill was vetoed by President Ford
in Fbruay. he House voted to override but the Senate vote fell
shor ofthereqired two-thirds. In his veto message, the President

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Distribution and
Bill .Trigger Funding levrel elgigiblity Usie of funds

Acc d Public Works, On congressional action-- $1,500,000,000 author- Distribution on a proj- Constructin re novatio
tite -Public works ized for appropriation ect basis; project repair or improvemen

iient bill. tougfis 197 eligible only st publi ee
labo canbegin withn dams, canals and othe
90 days ofApprova waterway projects.
Prort toarats o

high unmpoyenet.
Ant-rcesion Grants, til e Whenever national Funding authorized for Elgbit limite iot Maintenance of basic
.l. works em- unemployment exceeds quarters. Amount gen purpose services. Cannot be u
plymntbill. 6 percent. available for obliga-- governmpeut in areas for major construction
tion per qupeer equals with unemployment

0.1 percent of e- 'funding is set aside for
ployment abpove & per- eligible State govt-
cent in the previous ments. Distribution by ,
..calendar quarter. formula based on
general revenue shares
-and excess unemplory-
ment. Excess unem-
ployment is the dif-
ference between the
current rate and 4.5
'percent. All utifts
within a State for
which separate unem-
ployment rates are not
calculated, are treated
as one for purposes of
determining formula
.... .. .~~~ ~~~ ........ ...... ... .... .. ++ ++ .


SDistribution and
Bil Trigger Funding level v eligibility Use of ud

Brown-Griffin supplemen- Whenever national $780,000,000 authorized Eligibilit lmited td Any labor intesv
tal community develop- unemployment exceeds for approprigation. general purpos loocal activity cositetwh
ment employment 7 percent. Am ounts availble for governmetshf In areas the communt e
assistance. obiato pe qatr whunmeploymnent velopment ln
equl $1,0 ,000fr hger th'an 8t percent
eah etho a per- Thee quarters of
cent ap ue plyboet available funding is,
above 7l percenti tho distributed by formula
previous alenda to metropolitan cities
qather and urba'n counties.
Remainder distributed
to StAtes 6rt use by'
smaller; loca~lities with
W&g unemployment.
L:i i i iim -1 i j | | i i s. ii F i i"" "" .. si f ........ .... ........ .... .... ... ..

.Triggis: Bot anteesn grants. 'And Bro n ar e
triggered'by national unemployment. 'The antirecession. grantsi ,t ,

iiii; """"""I;
efr tv iditlyuonaprpraio o uns

nauthorizes funding at aubst
tia& owr lve tan ddthe ,vetoed Pbich Works'Emplo
men bil. Wee the uneimployment rat to remdain constant
nthrugh the endf ical e 19
billon wuld ave been miade available for obligiation. by the
Al;,l:i Wok'E.lymn il $

P'lymn bil .5 billion for accelerated
publewoks;. $ b6 illioin for a ties ,on assistance); Brown-

cirpuiaiii iisii

public orks Ep billq
or jrsditons fo fnding than does rwAGifDFud
.,.fr. cclraedP bli wrks (Titl 1 oftePW&ii are
a pojet bais; anitirecesso i r tos ( itei

distributed on an,,,;~L,

ofth PW il)an splemen'tal cmunt deveomn
forul. Ay tat or geerl purpose local gove nmn
w 'h hig er than 4,5 percenti elgbe for

i u
menl asl CO.amn
Useofasisane:Antirecessin grants can be used to purhase
matrils ndlabor necessary for the mam'iten'ance of public
servces.Brow-Griffin funds can be used for any activity-
contrctin r otherwise-consistent with the community's
de~vlopmnt lagiy Accelerated public works would,i of course,
beconstrction activity.
Threar to eprate though compemnaryqual to be achieved
'by pogamsoferngcountercyclical passistance; to stmuae economic
rwovry nd t moerate the nega~tive impac o recession on Staet
To'& efecve a rogramn must create- Rew demand and stimulate
s wih, epqndturs in the right amount, in the right places, at
ihe igh tie. n areces'sionary period, accelerated public works
and suplemen aluding for community development will almost
certinl cratenewjobs since -a high proportion of community
deveopmnt ad mjor construction money comes from the Federal
Go~erment~nd moe money, vill. mean more activity. Antirecession
taar lyprvde, n

grnliey aob used to fund servi~ces previousl rvdd n
Wil-,.ive -astiulaive effect. if they, prevent a community from
h&V~9Ao~ise~xes r cut service in response to declining revenues.
I o-th grdtet mpact, stimulus. should be applied. as -soon as
Ahee i clj~reviene of recessioii. Once. recovery is well undewa
atimlaivk pogrmsmay have, an .inflation~ary impact as thyrequire
,"84md Nwh ab.,becoming scaxce. Given. the present stage of
J1 i.

... ... ... ... ... ... .. ... ... ... ... ... .. ...... ... ... ... .. ............ ... ................. ......... H HHH HHH HH HHH HHH HHH HHH HHH HH HHH HHH HHH HHH HHH HHH HH HHH HHH HHH HHH HHH HH HHH HHH HHH HHH HHH HH HH .................................................................

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-rise t frm ublic, wosrks al -roaorih cf honTtne w -up ime pp '16 ;;;;;;VO heeg;; U;;' bl ic

vorstrWcibn be effecties wve r, a4 rpa if and ato i in
andsbemphasisra is paced. onuchlo projctg. endrir-rflnbl
mapdy. have siiarntiresiug dificutis&s wel totu 'ith6peenc
-o terviedstheinrpg communit developmenat Vptkgatrori-1a
reean o inid) pc agsubstantia proprteion ofe thfasmyb:ue o
cosructiona gap ivties. 1ealining S air-loand reoainpoe r
possieloalternative des.o Suchpojects billi Af

raidy Sine antire graants loare tou t n g g
sefvectd 'their impac shoulad bfeto whiativl quikly
ImA ne perentage poibnt. Thcrat im thee -ntonh verhlynttrt
create hav gap bae tween redluce sp 8bendlocl reeusadite
.staueuloale servicedkernd of $6 billion. Atus 7. ecntuep
pot atebugt of State anmlomnd oa ovme would be adhe at
mnce wequred onl 4holdt t s the gee governmentsi th agegt

effects of recession. To be most e'fricient, this monywudbcaely
allocated amnog individualur titns to recth edf n
fiscal positions of different State and local goventts
The IJEAA program begun in 1969, expire tteed'ffsa
year 1976. Outlays were $0..9 billionr in 1,975 adtecretplc
level for 1977 is $1.0 billion. The Presidenthaprosdtrew
the program but at a reduced budgetr authority f$. ilini 97
LEAA grants account for approximately 1Yecn ftoa eea
aid to State and local, governments, and 5 percnoftalt6a
outlays ,on law 6nforeement. Thus even majorcagsi h rgt
would have only syhall effects on the Feeral i itre.glbt
economic conditions, or the fiscal positions of rC etgvrmU
The more important impacts are in terms 4 of eal 4Sau n
local law enforcement activity. These impacts aebe tesu*
-of cotisiderable controversy.
Much of the controversy about LEAA relatst ht xetti
program should simply provide financial asstac o ea,8
enforcement agencies (or, more vwidlely, crim: .l~tc sstm)V
-opposed to retining more Federal ntrtol 0t
they are spent on resevh,'idemonstrationde

controk cl projects vrnal fT= a greater tehwano ahein h Jn
for a given amount of mnenn A second issuehsbentefcso

lawnforement versus t14%e m~ r*wal justice. system; LEAA
hasben oving away, from an iita'eav concentration on law
qui~e, AJtbWd a" apei~tst, wsf,0AM.ther feart Of
P~hawkqf &yvsMw em plvig Optemeo V e S147 wfopv q4n
wit. -0 1".avtowaAn 'Wtot 00 Venwreakt or modued
funin lves, or targetting of -resourf, -v~Vp*nn qt innovatjh
appoaces o improved criminal justice.
i"nt byrdcm am

twe, w cos tie rWyetimqtd
Q lVQ gove 4metse os Otliew ne

ats by~hih potonoetrd 4A ik&
1Z d Ouchwr erment O moes atlgestta bikedon to inrduce
tb~~ u thmba at ofetr usttt aal inethen1eats of xp rte
Wapffeq m uneivip t oed iii ths i from S ted
teniss amuto h us u tdatbsrgos6i

Sttq ind loal govrnmet nts ould heed on the option i 61 issu

ir ak$14 Weior Increase revenus woud oay'evethe subsidy costl
Oiten thtivmore substitute taxable ionvestmeentssu f.
h~dWI99 o an-re Gmanlials.Th offIset aclbe, as lh:k or evex
Mo'*o-thh ther o-~nt o~gnn subsdy but Macesactt-es e is
it pei

ide eeLld andis would bdepetnd onssthe' dwa ebiiktyo
es em.aba Sdsd o Sats and loany'-rvenue ofsts would
qTrlti~ik moreal tubitredin cou taalie at a lowere issued.t a

Allofthesertos movFeeral ~ Furnede ra iwurance.f of risk.pmen
pvN1 auhorit couldn mie hunismb setldn tqsb cial 'nratsare th
ktiores y o- bota nds then ud b- tosmall aun localioons. All of ahs
4dy 11 woedreduce to roelminat coudhe ditcapln owe i ntosed oat
witha vroetsb the difrnemttruhCngessi.onarle thir oprn bons.A
StatesMi etbispin evbylopmen banksthrough insuranew or diffrectia
,subsidy;s, o othersai e l agtehnss Qrisrnoibe. iA dteveorpmbnt
on~nim wed e's Cillx mces h

,ih, l*6ta'iliy 011 biW* ssue" by a~nll r&&tion. Al bf hes

Nkp.ae. y:18 m -aok. of ril differentia

rsy;y poi' ticaix and' ad traiove, pxoblems ."~i~ f

lovpal the: 0e01ain oulSg 6clpnW yimmd
general -evfftu sharg -and/r rmt o aite xftftrs
itleast to somie extent and .ofn -teI-h n4s ft~bl
uncertainty .,to fatre benefits. ri

As already noted, the Paesde~ntlts 1--7adewudrdc eea
sppedi~ng as~well as Federal control in aeoiairorm.Bdt
idig !6x e. $66 s-' -1 6r

asistnc (functionrgra 850)n*, his pros
below, and for pth Ia .i oo
blwcurentbeoicy.tbU 9k
Fo al hiiiiiyanrdesouc programs comine (fnfe, to 5
On rdul nttes and. Iosl gurain dalMa
gggy~~I ent tos9ct.Mn
m~nts are'$7.3 billiiii IIIir 1.8 erentlilo* cirrent'' ''licy. For geneia

beow currentpolcy.cu:n evaglv
1 t ister.ardtope-ipact. h,on Sae itriuinlieato hszt
on idvda, Sates xaned. wlocl,vg juidcti so h-raoso
l'.to cotinu prpcuswol ren e plvl
reafb r t p,
accordmgiiil 0~~lilr ther ow piriis.E

mentsom inap even progras tilauxhe
how muchi iis~ spen iniieachi are.

Praesinceaes.', pOposers will gravenot asitnean/roceneIti
eprates.14ltirmat himp apopsoned Stmding lf sa iuain, rga
In hefalhs, chind nutaxpayersiwillv,' neu
major r c gs Mostxy ra yalq;g j
Thee Prea sre propo o rp

aeder al )gaid s justnoldatr otc10grii billio:o1
S'tate-sa oulanfo health, ancti cid nalr
privmte spyndig Site teii ira The

oUtlas inorn Fedralgrants wil ftherinheas tsAJcIl~ii
hbo u i Spe ent, in '' h c al 1977 ao

w m c theioptions, th

Presien'prosls- oer gramnt coslfain can beidealtW
In Medicai, cheJI deriiovelop education g rsd~~t~r
majr sonsctuand 14 oter helsth oralof h atgrca rg

summarizefi;, ii the i priqposals. i
Federal aid sii ,;;,i ;;;l ;
1,, just undqr ear Th 40, P t 9iii ,iiiiiii
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Fiscal Fiscal year 1977
current Current President's Difference
pdliey ioly reques t
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Meia dna
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enalites jh"i! wol oth.n e inii the ;bloc
omnityshueat cenlter nitnneognsain poesoa

C~affnW hdntain curealth plc o h nivd rgaste

.. ....... he .............. ni i @ i ni r ui ons i s m tl y

9*r n powerprgrms
Toa -------------------l7 -7vie 9.6l 10A 1'.entate

er tntndott tae oahooll peningohlt
inco: rease gtaxsudrte lc rf loainpo

Vo atoaeducationwththeiintoofmntoyctshrg
MOi.lrsr rwrhry ki +hsource.ri4@ nhi

............................................................ i! ......................................................

astor Anata ke htelthsei0 'iiiiii n i iiiii W. 6ii6

programs mo ditklay, to U trena l ir'4e dh*OaWVlem" w in the
Federal grants, such as ou trpvteipt *Ww" fq community health care,
and. home health care and screening programs.-

The President' propeoas awould--reduce Federal outlays for ele-
mentary -and secondary weduation -by -$IA billion -below currnt
policy levels, and release programmatic controls over 27 speeiabs
client programs by consolidating them into a block grant. Mos 6f the
President's cuts are concentrated 'in programs. for the, oconbtnlially
disadvantaged and students with special nee&11
The Federal share of public school expeatwa Wensed rn
the early 1960s but has remained stable since then at around S percent
of the total. The State-local split of the r-emaining 92 percent differs
wiisiderably for State to State,;
The cobined effect of the 'President's fu d' ad consoldto
requests would depend on State-local structures and responses;. the
effects will surely vary by State and by locality. FjIciegelesC~ dwesto the
added flexibility in the President's consolidation pro~posal may 06set
part or all of the difference. in funding from current 'Wrdice lvels.
States and local governments may absorb part or all af the: added
costs of m iiqtaining eprrent saervice levels through increased taxes,
ava~ila~ble revenues, or- shifts in' program priorities. The overall- ffcal
impact would be small, because the proposed cuts are only arvwad I
percent of aggregate State-local spending for edeaftion. A-
Federal education programs presently attempt to foods t rnm
ically disadvantaged group and those with special educati=..rkpeds,
such a~s the handicped and bilingual. Negative *Rects 041 *Jwse
groups may be less were the groups are highly concentrated and well
organized a ~g., Chicanos in %he Southwe4,-th4e handieappd in
Maryland and Mascuetor wherie..exmplary Stata sams
currently exist (e.g., compensatory education programs in r~ie gan
aud California, and pwrer m for' the handdleApp in Washingemod
Now Jersey, Michigran, eaife a North Caoln, and Mase @h
setts). Howevrq where prg neffertaih abdUe axdwuav& vly B wame
or where affected up matos a7 e. disperse pod O 6A org&=Ot a
the current benefieiarieg more fibey to ho adveridy iftneta.

Tbom aro now 16 hU uotriio pwaawee which.ga Cot e the
F~eder4 Gqovenmeo* $2,7 I Qon iA fimal lWP. U? ThtPesidet prooosew
to consoliate *A ot these progoms uner. w CWild Nvtrit"o Rekom
Act(bockgrnt) a a u W9e level of $210 billRe few fsc1977 Mak-r
paed to curen p ey. eatima~te 9f 434-:billin Locak watehing
Areq eeto & rento eeinutd
In 6i 1W6, it is, estimated that M eg 84.9 Wini. ..W. be,..ii
IFederek Stae, Io4ol, *ad privats eawre fw,:t"epurposeoloim
taiigthe U40io*'d Qhd4 uuoitingpru rak
Of he tiqtal,, M pe *"nt wilg be IMe. y h, aea .be
me~at, 20 percentia b;y $40te andjq 001a Worcs tmktimaaaeb
recipient children.
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fornonneedy students, school food seirvice systerns couldcniu
to srve hemeither at a higher meal charge to the student: rwt
reaer satead local contribtialons, or a combination of boh IIh
ed al cost were borne by the non-needy stu
chageswould 'Inrease by approximately 25 cents (up from a vrg
of 5 cets pesetly, tand the, cost of a half-pint of milklol n
crese y aout5 t 7 cents .(up from4 6 cents presently). h oa
cos tobe ore, then, to mlake up this price. increase wouldbeapoi
y $50 million. (The remaining $450 millio in reducti
currnt oliy lvel results from caseload growth expected udrcr
ren la fo whchthere would be no new funds.)
elementayschool children from families bove th
lin actprimail from the Southeast, Southwest, and Midws ol
mostlikly be adversely affected by the block grant. Infat (ne
age p 1)nw eeiving benefits in the special, supplernetal edn
progtnwoud be excluded fromt being served tinder the grit nois

V C.oncuio
Ove th lst 2eades, total government outlays haveinrae
steailyas &roprtion of 1XV, due principally to thegrwho
Stae ad lcalgoernment expenditures. A signdificnt soureofsp
porfr ncrae State and local spendling has been increaseFdra
gratsinaid, which have risen as a proportion of both Federlouly
andStae ad localotl *9tir At the saime time7 Federal cotoloe
Stateand local uses of grant funds has declined, throughmvst
Vtiern ha reniA ring and bloe~k grants. A bioic qtustion udryn
thi's yasbdget decisions is -"Shottld the"e trends co~ntilfu?
Th crrent recession complicates this year's decisions.Grni-
mt ht1p state and loca g-oernmonts oer ak d6ficl dBB
whe tei revenues are cyclically low and their service dmn
io~ll igh. Grant rehusttons Will int most cases disrut Rrie
Stae ad local budgets and prompt srvice ctback and taxinrae
whih wftwork a hardship onpeople in need and undermin atoa
econmw rcovery. However, directions can be get which wl lo
fisalr'lataons to develop along desired future paths. Antrceso
jqrsts rovide a flexible tool to address the current fteeds of tt n
Joet gvernments and national economic recovery withou ocn
14qn-xw Vederal-Stale-local fical relationships down any priua
V. lonImger-run, a number df sructural directions arposbe
OW.W h hits been recomnunded by the Labor and Publi efr
COUU~tee mvoJveg grant imeeases above current, poliylecl
pricipaly for education awl jobs4-without major changeinpoa
re. Another is to follow the President's conceptua
and(1)renew revenue sharing with multiple year funig 2
extnd he Lsaw Enforcement Assistance Administration blch gat
and(3)consolidate existing categorical programs into fourneblc
grants in the education, health, child nutrition, and social services

ara s. Tis will bcontinue. the tne& owid4qellcnrl bc
shoudi reut 't~ill r h a d 11iince&n' cdorAblzldn
bf Fede r1 gran s o
how much saving over eurrent growth trends: I is pos~ble and: how-

quicklyAit caj be. realized. The ma or tions ip th Pr

currentam expenditreisatcret: icleefrfsal17an
aim t stabilize th dollar amountorreduce

pofoFederal gats e Y Pe thepio asa eutO
consolida~tion.hr fi
-Acepi te resdet' pop s o $9.3 billion in iutbacks 'froiIn''
curen policy, which.lill red

yvruea 197 t Fedreralgag nts slihl beoahi stmtdfsa
year 1976 level

-Makies slctiv elae onsldationlthisyabtnta ra a
prpoed oriable Sthe Presdet an slctve ratreucinso
>roah cold sut ion whr eficinescn.b.'rhde or fucin

gr19ant's toSated aond local.ii goenet cniudFdea"oto
o iver useofik i S th ea funds, and fo o
needtace forsbe St an i

---option of renee~eea eeu hrn ihpoiin
less than 5yea fundig,
meliniation ofLA block gant ih ipt4,ud~grtie
for specific innovtive a~pproachs-o npoePiia.iutc
-compmitment to key n~ational sevc rgas uhA efr
S. 'reform, and .health inuance to b.buh hef ,wt
the proceeds of economuc growt n dcdgnrlspot
for State and 1peal governme
Under all of the above possibiliti
grants are appropriate t6 addregs--utn Stt-6a'fs ed
without makinglany unwanted Vermaetfhigicmimns
This year's decisiotis can serve bothteso-rnadte ngti'
If one wishes to achieve long-ruvi goal fgaiit.oTde~&o
government or savings, fromn grant conoiain h i o ie f
cutback sharply on grants and disruptSaeadlclfsa .01in
ow -in order to do so. At the: same', iie, ii on *sh! toM
ew logrun direction, there i no66dtos
portant opportunity' to do so on aoo-i 1"be-h6 h.Psa
strained condition of:State and local~budo"t
I~~1 j tit,"
8L g~i4

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lostimcme r inomesuplemntation for Americans who are retired,
'ifsaled o th srvior ofdeeased breadwinners. Nearly one-third
ofall.-Feeralrvenuesaredeived from the special taxes levied to
fun thse etiemet sstes.And nearly half the yearly growth ith
urret sevi bud t esults from rising numbers of bene-
enrgrams, from automatic costf-living
and o igher real benefits caused by
imeit programs in fiscal 1977 under
..... iwit l 5 il ,.... about $87 billion of which is for.
sociJ scurty:andrairoa reirement' benefits. Another $29 billion
goes fo Meicar an th Feeral share of that part of Medicaid
tha ais te aed anddisble. Civil service and military retirement
accointfor 18 illin, nd eterans disability compensation and
b efts 'otal$8 bllo. Welfare programs for the aged and
-,V,211 pay oiut i 6billion.
Alarticualy the issue of social security
finncig, re mpotan inth context of the 1977 budget and the
perio o 1977 to 1981. However,, these issues must be considered in a
as: (1) the long-range projections for
aocil scurty howa lrgedefcit in the 21st cenitury, due in almost
equa mesur toadvrsedemgraphic trends and to the "coupling"
probem;I an (2 man be efiiries under one retirement program
drawbeneitsfromothes cncurently, so. that individual program
it each other. Thus, alternative ap-
raemmust allow for their likely impact on
Sn rsgesand for their effects on all related bene-
ftt The fllowing paragraphs describe
Uhe ajorissesofimmdiat inerest this year,,

t~oulinf rfer to prble inthe way social security benefits are adusted
forWA~ion Th adustentaffctsnot only current benefit payments but also
fixiti.'bnefs, or eope, ow oring. This resul~ts in their being overcom-
pezsated for inflation.)
i t: T1 1 4

on a rapid rise in benefits rsonding to double-digtifaonad
shortfall in treveues due to the -r ssiou. Since thtr1o ffca
,but unpublished projections ar er optimistic. byso trt
fund reserves declining to $30 billion (about 8 months ot fier
fits) in fiscal 1981. A projection b BO has the resrebfoli
,out at $28 billicn. in fiscal 1980 and m riigi the nextya .1
Although the outlook is now more optimistic for thsotrn h
President has proposed rasg thet rate by 0.3percentea
-employee and employer (fromi 5.85 pefcent of covere ae o61
pereent). This would: raise fiscal 19771eeus y.. ..
billion for a full ia 0
months' worth ofb neft.Ti proposal has been ertczd o'4e
,reasons: (1) it wil add to th cst of godsan servpdterb
-contributing to inflation; (2) it reduces te proposed fsa tmlso
,further income tax cuts; and (3). it woul combne niu ei

the following:
(1) Action could be delayed for a ear or two ifthfiaclstuio
permits, so that appropriate action for the short-rncne osee
and developed, as an integral part of the long-rnsluin.Adea
would cost the fund between $1.5 and $5 billion frec ea fdly
to be recovered over the actuarial period of 75 yeas.
(2), Limsited changes. could be made now in the. a an/rbeei
-structure which migrht be depmed an appropneate pr fayrmd
for the long-range problem. Thi would reduce the presr oepo
an integrated solution quiky. Alternatives fo a iedcawe
(a) Increasing the wasge base, which redistiue th a bre
toward those persnsn who earn wae s higher te h urn
maximum, of $t5,300. It could be argued that hseniiul
could most easily beax the additional burden, fihwol ea
no greater rate than that paid by loear wage ereg.ado.n
greater portion of their wages. On the otherhantehihrwg
base wouldd' generate higher benefits inthe fturalhugnotb
enough to inceaose the longrun defict. onsierto aloau
be given to the potential 'adverse eff~et n priaeivsmn
niaxets and on ivt&apit~alformation.
(b) Eliminating flee ceiling on tho wage basefort#ep w&
is a posible long-run remedy because it does no euti1xar
,employee benefits in the future. However, it blbea&
tax increase for emp'lovlers, which might be pams ont
through smaller w ge uftcreases or inm s'hifts betwa am =
(c) Use of part of the Medicare payroll tax forcs enft a
2 This discussion refers to a combination of two trust fund:teoda n
survivors insurance trust fund; and the disability insurance tutfn.Mdcr
is financed through two other trust funds: the hospital insurac rs udzn
the supplementary medical insurance trust fund.
$ Congressional Budget Office "Five- Year Budget Projetosrprtr-
sented in testimony before the House Ways and Means SubcmitelnSca
Security on February 3, 19761