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current problems

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V.USOSKIN, R.ENTOV, S.TARASENKO

__TITLE__ US Budget and Economic Policy __TEXTFILE_BORN__ 2007-04-05T10:12:21-0700 __TRANSMARKUP__ "Y. Sverdlov"

COPY 15

PROGRESS PUBLISHERS

MOSCOW

[4]

Translated from the Russian by Leo Lempert

Edited by Mike Davidow

VCOCKHH B. M., SHTOB P. M., TapaceHKO C. M.

EIQZOKET H 9KOHOMHMECKA3 HOJ1HTHKA CIIJA

Ha

__COPYRIGHT__ First printing 1973
© Ttranslation into English. Progress Publishers 1973 [5] CONTENTS Chapter I. THE BUDGET IN THE AMERICAN ECONOMIC STRUCTURE 7 1. The Budget and the Public Sector of the Economy ... 7 2. Government Interference and Inefficiency of the Market Mechanism................... 19 3. Structure of Public Finance............ 36 4. The Budget-Making Process............ 43 Chapter II. FEDERAL BUDGET EXPENDITURE..........56 1. Military Spending of the Federal Government.....59 2. Needs of Economic Growth and the System of Civilian Spending.................... 71 Chapter III. TAX REVENUE OF THE FEDERAL BUDGET .... 83 1. The Individual Income Tax System........ 85 2. Federal Tax on Corporation Incomes......... 92 3. The Structure of the Federal Tax System and the Problem of Erosion of the Tax Base.............. 102 Chapter IV. ``THE PURE THEORY" OF PUBLIC FINANCE: A CRITICAL ANALYSIS....................108 1. ``Pure Theory of Public Expenditure": Main Ideas . . . Ill 2. The Pure Theory of Public Finance: An Analysis of Some Premises . :.................114 3. Mechanism of Choice of Public Goods........120 Chapter V. THE PUBLIC DEBT AND MONETARY SYSTEM.....126 Chapter VI. FINANCES OF STATES AND LOCAL GOVERNMENTS . . 146 1. Expenditures of State and Local Budgets....... 154 2. Revenue of State and Local Budgets........ 167 3. Federal Grants to States and Local Governments .... 180 4. Borrowing Operations and the State-Local Debt .... 188 CONCLUSION...................198 [6] ~ [7] __NUMERIC_LVL1__ CHAPTER I __ALPHA_LVL1__ THE BUDGET IN THE AMERICAN
ECONOMIC STRUCTURE __ALPHA_LVL2__ 1. THE BUDGET AND THE PUBLIC SECTOR
OF THE ECONOMY

Every January the President of the United States transmits to the Congress a series of economic documents which evaluate the current state of economic activity, forecast developments in the forthcoming period and chart the course of government actions in the economic sphere. These documents are: the State of the Union Message, the Economic Report of the President with the Annual Report of the Council of Economic Advisers and the Budget Message. The American press regards these documents as the ``national economic plan" which, however, essentially differs in content and nature from directive plans of national economic development. The President and his economic staff merely indicate specific directions and set some general goals and guideposts for the Administration in performing its economic functions. But these recommendations are not binding on the private sector of the economy. Correspondingly, the final results of economic activity as a rule essentially differ from official outlines and forecasts.

The budget occupies a unique place among the governmental economic documents. Since the main part of the national output in capitalist countries is produced by private enterprises the budget serves as one of the few channels through which the government is able to exert purposeful 8 influence on different spheres of economic activity. At present the budget has been elevated to the rank of the most important instrument of macroeconomic control and regulation. Being a condensed expression of the government's policy, the budget reflects as a mirror the changing pattern of socio-economic priorities and preferences, and the arrangement of the Administration's economic and political objectives from the viewpoint of their urgency and importance. The character of the allocation of the budget appropriations for various programmes and categories of expenditure, shifts in the relative significance of individual budget items, changing structure of tax receipts---all these express in a specific manner the peculiarities of economic growth, the acuteness of class and social conflicts, government policy and the state of relations with theh outside world. In brief, the government budget reflects the most profound economic and political changes under way in the country.

The steady absolute growth of the government budget and its rising share in relation to the national income has become an essential characteristic of the capitalist economy at a high level of its development. This process is by no means accidental: it expresses the immanent laws of capitalism. Enhancement of the role of the budget is a reflection of the profound changes in the functions of the capitalist state which have occurred in the last half a century. These functions have become a serious factor which exerts a many-sided influence on all spheres of economic decisionmaking.

Engels pointed out that as the productive forces of capitalism grow ``... the state will ultimately have to undertake the direction of production".^^1^^ This development confirms the fact that production which is social in its nature requires social regulation for normal functioning. At the same time the tendency towards centralisation of economic management is displayed under capitalism in specific and contradictory forms. State guidance of the economy, while preserving _-_-_

~^^1^^ Karl Marx and Frederick Engels, Selected Works in three volumes, Vol. 3, Moscow, Progress Publishers, p. 144.

9 private ownership in the basic sectors of the means of production, is inevitably of a restricted, fragmentary nature and affects only separate spheres of productive economic activity. Moreover, the state does not compete with the private sector, seeks to supplement it and ultimately ensures the interests of the ruling upper crust of the capitalist class.

Nor is it accidental that the state began to play a special, exceptional role in the economic process only in the 20th century. At the threshold of our century deep-going shifts took place in the economic pattern of capitalism. There developed a network of large corporations, which concentrated a substantial part of national financial and material resources. The free competition of producers began to give way to various forms of monopoly competition. At the same time the amplitude of cyclical fluctuations of output widened, the crisis of overproduction became particularly destructive, encompassing simultaneously many countries and shaking the capitalist economy to its foundations. Under these conditions the state was compelled to assume an ever increasing share of the economic, organisational and ideological functions.

The process of restructuring the capitalist economy inevitably leads to interlocking and merging into one mechanism of the activity of large corporations with the economic power of the state. This process which is.now clearly observed in the economy of all developed capitalist countries is characterised as state-monopoly capitalism in Marxist economic literature. State-monopoly capitalism, as a special form of socio-economic relations, was profoundly analysed in the works of Lenin.

Capitalist economy changes and the growing complexity of the state functions have exerted a significant influence on economic theory. This was expressed in the crisis which jolted traditional concepts and doctrines of classical political economy in the West. The laissez-faire philosophy which propounds the concept of reducing to a minimum the participation of the state in the economic process, has lost its significance. It has been replaced by a directly opposite thesis embodied in the doctrine of Keynes and developed by his followers. It proclaims that, as a result of peculiar features 10 of the ``mature'' capitalist economy, stable economic development cannot be achieved without systematic and energetic government action designed to eliminate the adverse consequences of the uncontrolled market mechanism. Today the overwhelming majority of economists, with the exception of the most conservative wing, admit that the market mechanism of economic activity under capitalism in principle cannot ensure either an adequate (optimal) distribution of resources and incomes or a solution of other important problems which arise in the course of economic and social development. Only the government, it is asserted in most of the economic works, is the sole instrument with the help of which it is possible to ensure relative stability of production, mitigate social conflicts stemming from economic and political inequality, and impart to capitalism the stability, dynamism and vital force it lacks. State-monopoly capitalist regulation makes it possible to impose on the entire society economic decisions which are especially beneficial in the first place to the capitalist class.

The strongest impulse for revising the doctrine of noninterference by the state in economic processes was given by the chronic disequilibrium of the capitalist economy in the 20th century. The disastrous consequences of fluctuations in economic activity culminated, at the beginning of the 1930s, in what is known as the Great Depression. The programmes of state financial aid to the biggest companies hit by the crisis of those years facilitated the development of the theoretical concepts of permanent government intervention in the economic sphere. This greatly influenced the approach to problems of economic policy, including (in the first place), government fiscal policy. The sphere of public finance turned gradually into one of the main channels of the economic expansion of the state. Correspondingly, a huge budget and a growing public debt began to be regarded by Western theoreticians and political leaders not as an anomaly or a flagrant violation of all the canons of ``sound finance" but as a necessary condition for balanced development. The fact that a considerable part of the country's productive and financial resources are systematically removed from private economic circulation in order to undergo distribution and redistribution along government 11 Chart I Money Flows in the United States Economy -2- 099-2.jpg 1. Personal Consumption Expenditure 11. Personal Income 12. Corporate Income and Social Security Tax 13. Personal Taxes 14. Government Borrowing 15. Personal and Corporate Gross Saving 16. Disposable Income 17. Corporate Saving 18. Personal Gross Saving 19. Bank Credit 2. Government Purchases 3. Gross Private Investment 4. Gross National Product 5. Net National Product 6. Government 7. Indirect Business Tax 8. National Income 9. Capital Consumption Allowance 10. Transfers 12 budget channels in accordance with special criteria and purposes, is now regarded as a normal economic procedure (see Chart I).

The above chart shows that the government draws into the budget part of the incomes of the private sector in the form of taxes, payments and loans and then returns these financial resources into the income circuit in the form of expenditures for the purchase of goods and services, transfers and grants. Participating in the redistribution of the national product and income, the government thus exerts an important influence on production, consumption and saving. This makes it clear why the sphere of public finance has become an active area of theoretical studies and practical policy.

The position of a budget in a country like the United States influences not only the domestic economic situation but international economic relations as well. The United States is the most powerful capitalist country in the world, and its budget includes huge amounts which are spent by the government for rendering diverse forms of aid ( including military) to other capitalist countries, for the maintenance of armed forces and military bases abroad.

The US Government budget is exerting a serious impact on the international monetary relations of capitalist countries. The dollar performs the role of an international reserve and means of payment and settlements in the capitalist world. To perform these functions stability of the purchasing power of the dollar is essential. But the latter is systematically undermined by the process of inflation affecting the American economy. And one of the serious factors spurring on the inflation process is that of the government budget, to be more exact, its chronic imbalance and the methods of deficit financing. It is not by chance that the condition of the American financial system is being closely watched by economic experts and government officials in other capitalist countries. A large deficit in the US federal budget serves as a sign of the further worsening in the international position of the dollar and aggravates the international monetary crisis.

For several decades the enhanced economic role of the government has been the object of intensive study by 13 Western economists. On the theoretical side great attention has been paid to the nature and causes of the rise of a public sector in the capitalist economy.

Many problems of public finance and fiscal policy are raised from this angle. At the same time there is also the statistical aspect of the problem linked with the quantitative evaluation of the scale of government economic operations and their influence on the economic system.

Data on the amounts of money drawn into the national budget, government expenditures and the public debt to the private sector are among the main parameters which characterise the level of economic activity of the state. We show the change of these indicators at three main levels of government in the USA---federal, state and local (see p. 14).

The data of the table cover a period of 40 years. They demonstrate the substantial growth of government activity financed through the budget channels. Thus, between 1927 and 1968 government revenue increased (in current prices) from $12,200 million to $265,600 million, i.e., almost 22 times, and the expenditure 25 times (from $11,200 million to $282,600 million). The public debt (at all levels) amounted to $33,400 million in 1927; in 1968 it reached the astronomical figure of $468,700 million (an increase of 14 times).

It goes without saying that an appraisal of government operations is also influenced by an external factor---the change in the purchasing power of money linked with the change in prices of goods. If the budget revenue and expenditure were expressed in base year prices, the figures denoting increase would be more modest. Thus, using as an indicator of price changes the deflator employed by the US Department of Commerce in calculations of the national product and income (1958 = 100), we obtain the following picture: the revenue of government institutions at all levels in the USA in constant prices rose 9 times between 1927 and 1968, the expenditure---10.5 times and the public debt (including that of state and local governments)---5.8 times. Nevertheless even these figures demonstrate the rapid expansion of the state economic activity. For comparison let us point out that the key indicator of economic development, the

14 Table 1-1 Revenue, Expenditure and Debt of All Governments, 1927--1968 (million dollars) Fiscal year All governments Federal State and local Amount Percentage distribution Amount Percentage distribution Budget revenue 1927 12,191 4,469 36.6 7,722 63.4 1940 17,804 7,000 39.3 10,804 60.7 1944 64,778 51,399 79.3 13,379 20.7 1950 66,680 43,527 65.6 23,153 34.4 1955 106,404 71,915 67.6 34,489 32.4 1960 153,102 99,800 65.2 53,302 34.8 1965 202,585 125,837 62.1 76,748 37.9 1968 265,639 165,239 62.2 100,400 37.8 Budget expenditure 1927 11,220 3,410 30.4 7,810 69.6 1940 20,417 3,177 45.0 11,240 55.0 1944 109,947 99,448 90.5 10,499 9.5 1950 70,334 42,429 60.3 27,905 39.7 1955 110,717 70,342 63.5 40,375 36.5 1960 151,288 90,289 59.7 60,999 40.3 1965 205,550 118,996 57.9 86,554 42.1 1968 282,645 166,411 58.9 116,234 41.1 Debt outstanding 1927 33,393 18,512 55.4 14,881 44.6 1940 63,251 42,968 67.9 20,283 32.1 1944 218,482 201 ,003 92.0 17,479 8.0 1950 281 ,472 257,357 91.4 24,115 8.6 1955 318,641 274,374 86.1 44,267 13.9 1960 356,286 286,331 80.4 69,955 19.6 1965 416,786 317,274 76.1 99,512 23.9 1968 468,736 347,518 74.2 121,158 25.8

Note: Revenue and expenditure as of the end of the respective fiscal year; exclude intergovernmental transfer of funds; amount of debt outstanding as of the end of the fiscal year.

Sources: Statistical Abstract of the United States 1970, p. 403; Historical Statistics of the United States, Colonial Times to 1957 ( hereafter Historical Statistics... to 1957), Washington, 1960, pp. 722--30.

15 gross national product of the USA, during the same period rose (in constant prices) only 3.8 times.^^1^^

The figures show that the greatest increase was registered by indicators characterising the activity of the federal government: revenue rose 23.6 times; expenditure, almost 50 times and the debt, 18 times.

Military spending and related types of budget expenditures (payments to veterans of war, military aid to other countries, payment of interest on public securities, and so on) are the main factors responsible for the rise in spending by the federal government.

Revenue and outlays of the state and local governments are important components of the general system of public finance. A detailed analysis of these activities is given in Chapter VI. At this point we shall merely indicate the general tendency. In the 1920s the state and local governments accounted for the main part of all budget revenue and expenditure; in 1927 they represented 63.4 per cent of the entire revenue and almost 70 per cent of the expenditure. Then, in the 1930s, the role of federal finance began to rise until it reached its peak during the war. The comparative decline in the financing of state and local governments also continues in the post-war period, but their share in revenue and expenditure rose somewhat, to 37--42 per cent.

Lastly, there are other indicators characterising the growing influence of the state. Among them is the number of persons engaged in the public sector. Thus, the total number of government employees in the USA (excluding the personnel of the armed forces) was 13.0 million in 1970 as compared with 4.5 million in 1940. Of this number about threefourths were employed by state and local agencies and a little less than one-fourth, by the federal government. The tendency towards a rise in the relative importance of the federal government is also reflected in employment figures. Prior to the mid-1940s the share of federal employees _-_-_

~^^1^^ The calculation was made on the basis of data of Table 1-1 and the Survey of Current Business, July 1971, pp. 13, 46. The value of the deflator of prices for 1927 was obtained by extrapolation, taking into account the change of the wholesale price index in 1927--1929.

16 steadily increased. But then an opposite tendency emerged---the proportion of employees in the states and municipalities began to rise (chiefly due to those engaged in education).

Table 1-2

Government Employment in the USA, 1940--1970

(thousands)

Total Federal State and local total stale local 1940 1950 1960 1970 4,474 6,402 8,808 13,028 1,128 2,117 2,421 2,881 3,346 4,285 6,387 10,147 1,057 1,527 2,775 3,228 4,860 7,392 As a percentage of the total 1940 1950 1960 1970 100 100 100 100 25.2 33.0 27.5 22.1 74.8 67.0 72.5 77.9 16.6 17.3 21.1 50.4 55.2 56.8

Note: Figures include all persons in government employment except for the armed forces.

Sources: Statistical Abstract of the United States 1971, p. 420; Historical Statistics... to 1957, p. 709.

It is also interesting to note the steady increase in the proportion of government employees to the number of persons engaged in the process of production and distribution. In 1929 government employees (excluding the armed forces) amounted to 6.5 per cent of the total number of persons engaged in civilian production and in 1969, to 15.6 per cent.^^1^^

Another widely used indicator of state activity is the proportion of government purchases of goods and services to GNP.

_-_-_

~^^1^^ Calculated according to the Handbook of Basic Economic Statistics, June 1971, pp. 12--17. On this question see also S. Fabricant, The Trend of Government Activity in the United States Since 1900, National Bureau of Economic Research, New York, 1952, Appendix B; pp. 161-- 203.

17

The share of government purchases which during the Second World War reached up to one half of the GNP stabilised during the last 20 years at the level of one-fifth of the GNP. This shows that a huge and to a certain extent stable market for many enterprises of the private sector ensured by government orders, has arisen in the USA. It is difficult to overestimate the importance of this market in conditions of the dominance of market spontaneity. At the same time it is necessary to note that government-generated demand is largely of a one-sided, specific character. Its very uneven impact on different sectors and geographical regions gives rise to disproportions in the economy. A considerable part of the purchases is connected with unproductive expenditures by the government, specifically the purchases of armaments and supplies for the armed forces. The struggle for a share in the governmental ``pie'', which is unfolding both among big corporations and geographical regions, is an important factor in US political life.

At the same time the data supplied in Table 1-3 underestimate the extent of state influence on economic activity because they do not include transfer payments. These payments, as we shall see later, play an important role in the

Table 1-3 Government Purchases of Goods and Services ('000 million 1958 dollars) Government purchases of goods and services Amount Per cent of GNP Years GNP Total Federal State and local Total Federal State and local 1929 203.6 22.0 3.5 18.5 10.8 1.7 9.1 1939 209.4 35.2 12.5 22.7 16.8 6.0 10.8 1944 361.3 181.7 165.4 16.3 50.3 45.8 4.5 1950 355.3 52.8 25.3 27.5 14.8 7.1 7.7 1955 438.0 . 85.2 50.7 34.4 19.5 11.6 7.9 1960 487.7 94.9 51.4 43.5 19.4 10.5 8.9 1965 617.8 114.7 57.9 56.8 18.6 9.4 9.2 1970 720.0 139.4 65.4 74.0 19.4 9.1 10.3

Note: Excluding purchases of goods and services within the public sector.

Source: Economic Report of the President 1972, pp. 196--97.

__PRINTERS_P_17_COMMENT__ 2---62 18 redistribution of incomes among various groups of the population and they affect the functioning of the economy as a whole. Thus the relationship of all government spending to the GNP is often used as an indicator of the scale of governmental operations. In the 1969 fiscal year this ratio was 21 per cent for the federal sector (with the share of purchases of goods and services amounting to 11.4 per cent).

Many other statistics could be cited demonstrating the high level of economic power and, correspondingly, the influence of the government in the USA. Thus, the federal government owns over one-third of the 2,300 million acres of land occupied by the United States. Governments at all levels own nearly 20 per cent of the total stock of accumulated wealth (in the form of tangible assets) which is estimated at $3,000,000 million. Government-owned electric power stations generate from one-fourth to one-third of all the electricity consumed in the country; 30 per cent of total annual new construction in the United States is accounted for by public buildings and other structures (highways, dams, and so on). Lastly, about two-thirds of the total annual expenditures for research is financed by the federal government.^^1^^

By comparing the public sector in the USA with that of other developed capitalist countries certain essential differences are revealed. The scale of direct participation by the US government in the organisation of productive activity is relatively small. The state primarily owns enterprises in the military sector, the atomic energy industry and space exploration, these enterprises constitute an insignificant group of all the companies in the country. The influence of the state on the private sector in the United States is expressed not so much in the form of direct nationalisation of industrial companies, as has been the case in France, Italy and Austria, but primarily in direct and indirect financing, subsidising and regulating of various sectors (railways, agriculture, and so on).

These special distinctions in the development of the public sector in the USA substantially enhance the role and importance of budgetary channels of government influence _-_-_

~^^1^^ Robert H. Haveman, The Economics of the Public Sector, John Wiley & Sons, Inc., New York, 1970, p. 8.

19 in the economic sphere. It is not by chance that as regards the level and ratio of the budget expenditures (including local government budgets) to the GNP, the United States holds one of the first places in the capitalist world. Studies of the economy of the US public sector are largely devoted to an analysis of budget problems.

__ALPHA_LVL2__ 2. GOVERNMENT INTERFERENCE AND INEFFICIENCY
OF THE MARKET MECHANISM

The present volume of government activity in the economic sphere of capitalism bears no comparison to the situation which prevailed some 30--40 years ago. The significance, however, lies not only in the degree and scale of government interference but in the essence of this process. In principle the element of state coercion can be traced at all stages of capitalist development. In the era of the dominance of free competition, in conditions of the atomistic economic structure, the interference of the state was not only reduced to a minimum but was also of an auxiliary, ``external'' nature with regard to the ``basic'' economic process. The functions of government agencies were limited to maintenance of the general conditions of ``aw and order" and the protection of capitalist property.

Today in the period of the dominance of large industrial corporations which monopolise the production and marketing of major goods and services, the state directly interferes in the reproduction process and tries to exert a purposeful influence on it. A big corporation requires for its normal functioning stable economic activity, stable prices, guaranteed markets, i.e., conditions incompatible with the spontaneous, uncontrolled market mechanism.^^1^^ David T. Bazelon, an American economist, rightly remarks that modern gigantic capitalist enterprises would perish without such federal governmental activities as taxation, expenditures, grants, guarantees, organisation, aid, regulation and the ensuring of a proper level of the national income.^^2^^

_-_-_

~^^1^^ John K. Galbraith, The New Industrial State, Houghton Mifflin Co., Boston, 1967, p. 193.

~^^2^^ David T. Bazelon, The Paper Economy, New York, 1965, Chapter X.

20

Today a capitalist state not only openly proclaims its responsibility for eliminating the strongest cyclical fluctuations of economic activity. It sets itself the aim of guiding long-term trends, seeks to influence the historically shaped rates of economic growth and national economic proportions, create conditions for the acceleration of scientific and technological progress, plan programmes of ``social services'', and so on. The state is firmly ``built into" the system of economic relations and a sudden stoppage of its activity would most seriously derange the entire capitalist economy.

The increased role of the state in the economic life of capitalist countries is an objective and irreversible process. It takes place in all highly developed capitalist countries, although it develops, as we pointed out, at different tempos and in different forms. The opinion is at times voiced that the degree of intervention by the state is determined by conscious factors: the expression of the will of the masses, collective opinion about the ``permissible level" of the development of the public sector. Naturally, historical conditions and traditions, local distinctions, and so on, play a certain part, are superimposed on the general tendency. But the roots of the process of the augmentation of the power and influence of the state should be sought in the objective laws of capitalism's development, in the chronic instability of an uncontrollable economy and in the desire of the capitalist elite to utilise the state machine for consolidating its power. Explanation of the phenomenon of ``state capitalism" in Western literature is usually reduced to demonstrating the limited nature of the market mechanism, its inability to ensure the efficient functioning of the system and to solve important problems of social development. Indeed, such a limited nature is inherent in the capitalist market. But to reduce to it the entire problem of present-day state intervention means to ignore the chief thing. State-monopoly capitalism is the stage of highly developed capitalism which is characterised by the emergence of close and diverse ties between the big corporations and the state. This alliance ultimately aims at protecting the interests of the ruling class. Not to consider this primary factor, to reduce the role of the state to the position of a ``neutral and unbiased arbiter" guided by the interests of all sections of society would mean to bar 21 the road to an objective study of the nature and phenomena of contemporary capitalism.

At the same time an analysis of different manifestations of the inefficiency of the market mechanism, made by Western researchers, is by itself of undoubted interest. These phenomena speak of the transitory nature of capitalism, the inevitability of transition to another economic system based on social ownership of the means of production and managed in a planned way. These principles of organisation of the economy are more adequate to the high level of development of the productive forces.

The tendency towards extension of public operation is most distinctly displayed in spheres of the economy where private capitalist enterprise cannot or does not consider it profitable for itself to produce definite types of goods and services and to perform functions of vital importance for society. The development of the economic infrastructure, the educational system, a wide range of ``public services" (public health, pension system), the financing of long-range projects, the organisation of fundamental scientific research ---such is the most general and by far not complete enumeration of spheres in which the state tries to fill the ``vacuum'' created by private business. Here we have a clear example illustrating the point: the aims and interests of social development come into contradiction with the chief criterion of capitalist enterprise---the principle of profit maximisation. The public sector of the economy serves as a kind of `` safety-valve" which makes it possible, within certain bounds and for a certain time, to resolve emerging contradictions, to smooth over conflicts, to ensure society a minimum of major services for satisfying collective needs.

There are many facts demonstrating the inability of the market economy to ensure an adequate volume of production of goods and services of importance from the national economic viewpoint. Equally, the purely market form of economic organisation contains no regulators restricting the development of such types of productive activity which, although they bring a profit to the individual producers, directly or indirectly inflict harm on society. These features in the functioning of the market mechanism are specifically reflected in the problem of external or spillover effects. 22 There are many spheres of economic activity which, aside from the direct results paid for by the consumer, exert an indirect influence of a positive or negative nature. The person receiving the indirect benefit of this influence makes no payment to the producer for this service. On the other hand neither is the consumer compensated for by those guilty of inflicting harm upon him.

It is known, for example, that education, besides affording direct benefit to the student, is of use to entire society. But this effect of education is not considered in the payment for tuition, and the scale of this sort of activity ensured by the private sector is obviously inadequate.^^1^^

Here is another example. Many types of industrial production are linked with the pollution of the environment. But this effect, adverse from the viewpoint of society, is not reflected in the production costs. The state is urged to help increase the volume of services of the first type and reduce activity of the second type. Guided by considerations of the ``public good'', the state should stimulate education and introduce various types of free tuition, in other words, reduce the total cost of education; and it should restrict the activities of companies which pollute the air with production wastes through a system of fines, and so on (i.e., by increasing production costs).

Robert Dorfman, a well-known American economist, points to the existence of a large gap between the public interests and the criteria of private capitalist enterprises. He points out that there is a growing number of enterprises which are justified from the public viewpoint, but are regarded by businessmen as unprofitable. At times they do not bring in a profit because of the conditions under which the product is distributed or consumed (for example, ``collective'' goods, conveniences and services available to all comers), or because their payment is too burdensome or unjustified (street patrolling service); at times owing to production conditions (only the government can buy lands needed for the building _-_-_

~^^1^^ In conditions of the contemporary scientific and technological revolution and the economic rivalry of big powers, there are also other reasons which compel a state to step up the development of the educational system.

23 of highways or the reconstruction of cities); at times owing to the fact that the market undervalues some things which in the long-range aspect are highly valued by society (for example, preservation of natural wealth.)^^1^^

What are the most general illustrations of the inefficiency of the market mechanism? A logical scheme, presented with various modifications in many Western textbooks, is given in the book, Government Finance. An Economic Analysis by John Due.^^2^^ Due formulates a number of general conditions, the existence of which he regards as of exceptional importance for the proper functioning of the capitalist economy and the absence of which makes government intervention necessary. Among them are: = ``1. Maximum individual freedom of choice; = 2. optimum standards of living, in terms of available resources and consumer and factor-owner preference; = 3. distribution of income in conformity with currently accepted standards of equity."^^3^^ In real life, according to Due, these purposes are seriously distorted as a result of adverse influences arising in the course of market decisionmaking. Thus, the tendency to monopolise resources, capital markets, and so on, distinctly displayed in the course of the development of capitalism, reduces to naught the `` individual freedom of choice''. The optimum standard of living (under which Due implies the most efficient use of the available resources of society from the viewpoint of the public good) cannot be achieved because of the operation of such elements as restriction of competition in the markets of consumer goods and factors of production; capitalism's inherent hindrances to achieving full employment of manpower and productive resources; the gap between marginal benefits and costs as regards private individuals and society as a whole (the problem of external effects earlier mentioned).

As for the third important condition, more equitable distribution of income, Due confines himself to the following cautious statement: ``The market economy, even with _-_-_

^^1^^ Measuring Benefits of Government Investments, Ed. by Robert Dorfman, The Brookings Institution, Washington, B.C., 1965, Introduction, pp. 3-4.

~^^2^^ John F. Due, Government Finance. An Economic Analysis, Richard D. Irwin, Inc. Homcwood, Illinois, 1954, Chapters 1 and 2.

~^^3^^ Ibid., p. 5.

24 relatively free competition, has resulted in a pattern of income distribution among families, which opinion in society has typically regarded as inequitable, because of the high degree of inequality. The degree of inequality has been increased still more by the development of monopoly power."^^1^^

Due's laconic manner of speaking about the third condition is understandable. The uneven distribution of incomes is an eternal and the most acute problem of capitalism, the source of social conflict and class struggle. But the method of distribution is determined by the entire system of capitalism's production relations and can be changed only through transition to another, higher socio-economic formation. Palliative measures of the state in this sphere merely emphasise the pressing need for a cardinal solution of the problem.

An economic analysis of state intervention, as a rule, is not limited to a description of government activity or an explanation of the reasons for the growth of the public sector. One of the trends of study is an attempt to ascertain the ``optimum boundaries" of this sector, utilising for this purpose an apparatus of highly abstract models. The latter, as a rule, are divorced from the real conditions of the political process which determines the volume and composition of the government expenditure. It is a matter not of observing developments in real life but of what ought to happen given certain assumed conditions for the functioning of the system.

This problem is studied by a special branch of economic analysis---welfare economics. With its help a technique is being devised for evaluating alternative situations from the viewpoint of satisfying to the maximum individual needs within the limits of the examined collective or group. The proponents of such an approach are trying to employ the techniques of marginal evaluations elaborated in microeconomic analysis for weighing the public benefits and costs linked with government operations.^^2^^ But a study of government activity on the basis of market economy criteria is _-_-_

^^1^^ Ibid., p. 10.

~^^2^^ William J. Baumol, Welfare Economics and the Theory of the State, Harvard University Press, Cambridge, Mass., 1952.

25 exceedingly difficult. The point is that many types of government services do not have a ``price'' determined by market forces (for example, judiciary functions, defence, and so on). The absence of objectively formed evaluations essentially hampers (and in a number of cases completely excludes) the measurement and comparison of costs and effects. At the same time the existence of a considerable external effect in many services of the public sector creates a gap between the marginal evaluations from the viewpoint of the individual and society as a whole. This again complicates the application of the principles of marginal analysis to the study of government operations. For all the attractiveness of a study of the optimum limits of state activity, which is ``strict'' from the viewpoint of ``pure theory'', the apparatus of welfare economics, in the opinion of many theoreticians, is poorly suited for the study of concrete processes and situations. Let us refer in this connection to a statement made by Jan Tinbergen, an eminent economist: ``The problem of finding the optimum regime is the central problem of welfare economics. ... This means that we assume knowledge about two things: first, about the preferences of the individuals constituting the economy and, second, about how to weigh the interests of different individuals in determining social wellbeing or social welfare. In customary economic language this means, first, knowledge about the utility functions of the individuals and, second, about the social utility function. These are far-reaching assumptions because our knowledge about individual utility functions is very limited, and the social welfare function depends on how we compare utilities of different persons."^^1^^

A zealous custodian of the traditions of free enterprise Eugene Rostow writes: ``It [the problem of planning.---The Author] is inescapable because a capitalist economy doesn't keep itself at high levels of employment, nor can it accomplish unaided certain other economic goals of the community. And there are no institutions, apart from those of government, to carry out the essential preliminary function of planning---that of seeing to it that the aggregate _-_-_

~^^1^^ Jan Tinbergen, Central Planning, Yale University Press, New Haven, London, p. 82; see also Kenneth J. Arrow, Social Choice and Individual Values, John Wiley & Sons, Inc., New York, 1951.

26 of all spendings in the economy is high enough to ensure full employment, and not so high as to produce inflation."^^1^^

The term ``planning'' is employed by Western authors in the most diverse interpretations and aspects. It encompasses a motley range of concepts---from indicative planning of the French type to imperative or directive planning, from the compilation of the most general---long-range forecasts to projects and programmes elaborated in detail.^^2^^ At the same time, in evaluating planning methods, it is considered ``the proper thing" to regard with disapproval the system of planning existing in socialist countries, putting up in contrast to it ``capitalist planning'', ``liberal planning" and even ``planning for freedom".^^3^^

Terminology by itself hardly improves the forms and methods of planning. It seems, however, that planning, by its very nature as an instrument of co-ordinating different economic elements and subordinating them to a single social goal, must be of an all-round and binding nature and must not be confined to general evaluations and recommendations which are not binding on anyone.

We find a more pragmatic approach to the problem of the limits and intensity of state intervention among followers of the Keynesian theoretical scheme. Keynes formulated a number of causal and functional links between key macroeconomic factors (consumer spending, savings, investments, the interest rate, money, and so on) and tried to develop them into a single system. In current variants of the Keynesian scheme government spending and taxes perform the role of ``adjusting elements" which rectify discrepancies in the dynamics of the major national economic variable---the aggregate demand for goods and services presented by the private sector of the economy. The shortage of private demand (and Keynes-proceeded from the premise that the shortage _-_-_

~^^1^^ Eugene V. Rostow, Planning for Freedom. The Public Law of American Capitalism, Yale University Press, New Haven, Connecticut, 1960, p. 23.

~^^2^^ Andrew Shonfield, Modern Capitalism. The Changing, Balance of Public and Private Power, London, Oxford, New York, 1969, Chapter 2.

~^^3^^ Eugene V. Rostow, Op. cit., p. 22.

27 of demand is inherent in the economy of mature capitalism) requires additional government investments financed by the selling of public securities.The excess of demand beyond the level dictated by the available resources of society must be accompanied by government measures for curtailing demand (through an increase of taxes, and so on).

Hence the tremendous significance attached in the West to measures of government fiscal policy as an instrument of economic stabilisation and control. In its simplest form the general ways of influencing the economy with the help of budget instruments can be demonstrated in the following model:

C = C 4 cYd 0<c<l 0<x<l (1) (2) (3) (4) (5) (6) where C is consumption expenditure by households; c is marginal propensity to consume; Y is the gross national product; Yd: is disposable income (i.e., disposable income after taxes); T is total tax collections from households, x is marginal propensity to pay taxes under the existing tax structure; I is investment expenditure by firms and G is government purchases of goods and services. Index ``o'' denotes the initial level of the variable introduced into the model from the outside. From the given system of equations there directly follows: --------^---(7) AG I---C(I---X) \'> AY________~C (Q} A To 1 - C (1 - X) W

Equation (7) gives the multiplier applicable to government purchases and equation (8)---the multiplier for a change in taxes. In the first case the formula shows how the GNP changes with the change in government spending; here the multiplier is positive and equals, let us assume, 3. This 28 means that a change in the government purchases of goods and services by $1,000 million ultimately leads, through the given chain of dependence and effects, to an increase of the GNP by $3,000 million. In the second case the multiplier is negative (let us say minus 1.8); an increase in tax receipts by $1,000 million will bring about a reduction of the GNP by $1,800 million.

Government policy in various economic situations is based on these propositions: in conditions of a depression it is advised to increase budget spending and reduce taxes so as to bring about a growth in effective demand; on the other hand, in conditions of an inflationary boom it is advised to reduce demand by curtailing government spending and raising taxes.

But even quite incomplete, selective and poorly co-- ordinated measures of centralised regulation of economic activity have been arousing vociferous protests of the defenders of free enterprise. The general point in their works is the thesis concerning the need to restrict state action within narrow and strictly delineated bounds.

Contemporary capitalist economy is conceived as some kind of a ``private-collectivist'' system in which elements of centralised guidance should be administered in ``doses'' and combined in definite proportions with private decisions on questions of production and consumption. A bitter polemic is being waged over the ``best'' combination of these two opposite elements---centralised regulation of the economy and the spontaneous functioning of the market. Most economists are of the opinion that in the absence of sizable and systematic governmental actions modern capitalist economy would be subjected to disastrous fluctuations of economic activity. At the same time there is a large group of economists and political leaders in the United States who characterise the process of increasing the role of the state and growth of the public sector and the budget as ``creeping socialism" which endangers the ``freedom'' and the very existence of American society. The arguments of this group usually boil down to an apology for the ``classical'' forms of capitalist activity, the apologists claim that capitalism is a ``basically sound'', ``stable'' system in which the operation of internal self-regulating mechanisms is effective and charge 29 that deep disproportions arise precisely as a result of ``excessive'' intervention of the state in the reproduction process.^^1^^

A vast area of intermediate, at times eclectical and contradictory views lies between these polar positions. Moreover, there are periodic changes in the relationship of forces between the supporters of, and opponents to, energetic government action, largely determined by changes in economic situation. A decrease of output, increase of labour unemployment, rise of underemployment of productive capacities and other symptoms of a depressed condition of the economy are usually accompanied by a drive in favour of extending state intervention. Conversely, in periods of accelerated economic growth, widespread opposition is expressed against any increase in government spending and more people voice the opinion that it is necessary ``to slow down the growth" and ``to balance the economy".

These tendencies were clearly revealed in the USA in recent years when the Republican Party came into office. The Nixon Administration put forward as its paramount aim the slowing down of economic growth in order to restore the economic proportions distorted during the preceding years. Inflation became the main target of government economic activity. The Administration proposed: a reduction in the scale of government stimulating measures, limitation of the budget deficit, stepping up the use of traditional tools of monetary policy and the ``balancing'' of growth by curtailing excessive demand.

But the hope placed in the self-regulating mechanism underlying the government's policy was not justified. The sharp worsening of major indicators of production and employment early in 1970 forced the Administration hastily to revise its entire economic programme. This was also spurred on by criticism of the Republican Party leadership by advocates _-_-_

~^^1^^ M. Friedman, Capitalism and Freedom, Chicago University Press, Chicago, 1962; F. A. Hayek, The Road to Serfdom, Chicago University Press, Chicago, 1944; F. A. Hayek, The Constitution of Liberty, Chicago University Press, Chicago, 1960; Ludwig von Mises, Human Action, Yale University Press, New Haven, 1949; Henry G. Simons, EconomicPolicy for a Free Society, Chicago University Press, Chicago, 1948.

30 of ``activism'' and energetic interference in the economy. The Government had to launch large-scale stimulating budget measures which, in turn, resulted in a huge unplanned budget deficit in the 1971 fiscal year and largely reduced to naught the effect of former restrictions designed to curb inflation. As a result, the first postwar attempt to reduce the scale of state stimulation of the economy actually ended in failure.

Thus far we discussed the reasons for the origin and development of a large public sector and the economic policy of the state as an instrument of rectifying the defects of the market mechanism. To what extent do governmental actions ``correct'' the course of social development and improve the ``general welfare"? An answer to this question is given in subsequent chapters of this book. But already at this point it is possible to draw some general conclusions. The chief conclusion is that despite increased government activity, despite the greater use of methods and forms of regulation and control in the economic sphere, the state cannot alter the nature of capitalism which daily, hourly reproduces all disproportions in production and distribution which the state is trying to eliminate or mitigate.

Numerous facts reveal that in the richest capitalist country in the world with its powerful productive capacities and enormous redistribution of incomes conducted through government budget channels, obvious social contrasts, material and political inequality, far from being abolished, on the contrary, tend to grow sharper in the course of economic development.

The system of socio-economic priorities operating in the United States does not ensure the satisfaction of many urgent needs of society. In the short-term aspect it is the prime task of government economic policy to ensure stability of economic growth and maximum employment. At the same time it is gradually becoming clearer that an increase of national output and a rise in the level of money incomes do not automatically lead to a solution of the problem of social inequality and other pressing problems of capitalism. The changing composition of social needs has no adequate mechanism for their satisfaction.

Edward S. Mason, Professor of Harvard University and well-known American economist, in his analysis of the 31 features of a ``mature society" (he places contemporary American capitalism in this category)^^1^^ points out that recent experience shows how much easier it is to regulate the world of things than to effect even moderate shifts in the way of life of people and civilisations.

In Mason's opinion only some chronic disproportions inherent in the American economy can be eliminated `` automatically" if full employment is maintained over a sufficiently large period. These are: the ``farm problem" revealed in the relative overproduction of agricultural commodities and the systematic decline in the incomes of farmers; the problem of distressed areas, i.e., entire geographical areas suffering from chronic mass unemployment and low level of production; and, lastly, questions connected with industrial automation and better technology. The latter creates a real threat of ``structural unemployment" which cannot be eliminated by the simple ``creation'' of an additional demand for goods. Mason admits the acuteness and complexity of these problems but considers that the process of economic growth will ultimately eliminate them.

This confidence can hardly be shared. The solution of the long-standing ``farm problem'', the elimination of ``distressed areas'', eradication of the causes of ``structural unemployment"---all these require a broad comprehensive programme of socio-economic changes connected with shifting of resources and populations among regions and sectors, a planned change in the pattern and volume of production, regulation of economic proportions, and so on. Neither the market nor the capitalist state can undertake the implementation of such programmes on a sufficiently wide scale. Only the socialist system where production is organised in a planned way on a nation-wide scale can cope with such programmes.

Skirting round the serious problems related to inflation and balance of payments, Mason turns his attention to another group of questions which, as he admits, cannot be _-_-_

~^^1^^ Edward S. Mason, ``Objectives of Mature Society" in The Nations Economic Objectives, Ed. by Edgar 0. Edwards, Chicago University Press, Chicago, 1964, p. 2.

32 solved by a mere expansion of production. Among them are:

1) the change in the proportions between urban and rural populations;

2) the change in the age distribution of the population;

3) shifts in the pattern of consumer demand as per capita incomes rise.

The first point leads to one of the most acute problems of present-day America---the city crisis. According to census statistics, 63 per cent of the entire population in 1960 lived in metropolitan areas. Thus, not only has the rural population moved to the cities but the urban population has shifted from small communities to the very large cities. Not less than 20 million people will be concentrated within the New York metropolitan area in 1985.^^1^^ ``... Close to three-quarters of our people are destined to live in metropolitan areas and over a third in metropolises of more than a million, affected by what happens to our cities. And American cities, to speak bluntly but truthfully, are a mess."^^2^^

The second question raised by Mason is also quite urgent. It is a matter of the ``ageing population'', i.e., a comparative increase of percentage of the population in the age of 65 or older. This requires the development of pension and medical care systems which, according to the admission of specialists, are at present in an entirely unsatisfactory condition. And again the question is linked with the need to redistribute the financial resources on a nation-wide scale.

Lastly, there is the third question, concerning a change in the structure of wants. This, in turn, is reflected in a greater demand for some types of services and the stepped-up development of a number of sectors. The conglomerate sector called ``service industries" in the United States (and statistics include in it a very wide range of economic activities) exceeds the similar sector in any other capitalist country. More than 50 per cent of the entire labour force is employed here _-_-_

~^^1^^ Robert H. Connery and Richard H. Leach, The Federal Government and Metropolitan Areas, Harvard University Press, Cambridge, Mass., 1960.

~^^2^^ Ibid., p. 6.

33 and there is a tendency for a further rise of employment in this sphere. Moreover the demand grows particularly quickly in such areas as education, medical care and the recreation industry.

The more far-sighted economists, sociologists and political leaders are deeply concerned over this situation and are urging the government to take determined measures to increase spending for social needs. Of interest in this respect is the concept of ``social balance" advanced by John Kenneth Galbraith in his book The Affluent Society which gained wide renown in the United States and other countries. Galbraith considers that one of the chief factors contributing to the disproportionate development of capitalism lies in the upsetting of the balance between the so-called ``public goods" provided by the state outside the market for satisfying collective and individual needs of society's members and `` privately produced goods" distributed through the market. Galbraith notes that in contemporary capitalist society there is a serious shortage of goods of the first kind and an excess of goods of the second group. He cites in his book numerous and quite impressive examples of the ``crisis'' of the supply of public goods: the overcrowded and decrepit school buildings, antisanitary conditions of city streets, inadequate medical service, pollution of the environment, and so on. ``Failure to keep public services in minimal relation to private production and use of goods is a cause of social disorder or impairs economic performance,"^^1^^ Galbraith writes.

He cites as one of the reasons for this imbalance, the psychology of the man in the street who succumbs to the stultifying influence of modern advertising and buys vast quantities of goods he often does not really need but at the same time completely ignores urgent social requirements. That is why Galbraith advocates a further increase in taxes, and greater redistribution of incomes through the state budget for satisfying public needs.

This recommendation is hardly feasible in conditions when the tax burden reaches a very high level and the further increase in tax rates will merely produce a negative effect on _-_-_

~^^1^^ John K. Galbraith, The Affluent Society, Houghton Mifflin Company, Boston, 1958, p. 259.

__PRINTERS_P_33_COMMENT__ 3---62 34 the living standard of the poorest strata. Yet Galbraith's work indicates another, more realistic way of eliminating the catastrophic deficiency in public services---a change in the structure of government spending, a reduction of the military expenditure which absorbs a great part of federal appropriations.^^1^^

The ``social balance" theory reflects the real contradictions of capitalist development but in a distorted, irrational way. The stresses have been shifted and the real causes remain undiscovered. The chief conflict lies not in the sphere of `` relations of things" (this is merely the outward display of the disproportion) and not in the wrong psychology of the consumer. A powerful sector has arisen in the United States which ex-President Eisenhower very aptly named the military-industrial complex, for which the maintenance of military appropriations at a stable high level is of vital importance. Robert Haveman points to the pressure brought to bear on the budget by the interconnected aggregate of military men and political representatives of regions with large military bases, war industry corporations and also scientists and analysts working on military projects and the development of new types of weapons. Every member of this interconnected aggregate, often named the military-industrial complex, according to Haveman, thinks that an increase in military spending is in his personal interests.^^2^^

Thus, the US government budget is far removed from the idyllic picture portrayed which presents it as a mirror-like reflection of the ``collective expression of will" of American citizens. Its structure, and the priorities given to particular programmes are determined in accordance with the desires of powerful ``pressure groups" which at times gain great influence. The widely advertised projects for improving the distribution of incomes by creating a ``welfare state" _-_-_

~^^1^^ ``In the mid-fifties defense expenditures were rather more than half of all the expenditures of the federal government and rather more than the total expenditures of states and localities combined. Were these sums to become available in any considerable part for the civilian services of Governments in the years ahead, social balance could be quickly restored.'' (Ibid., Cambridge, 1958, p. 312.)

~^^2^^ See Robert H. Haveman, The Economics of the Public Sector, John Wiley & Sons, Inc., New York, 1970, p. 220.

35 which spends a substantial part of the budget revenue for satisfying the needs of the poorest groups of the population as a rule, fail to achieve a set objective. In princple ``the welfare state" is in duty bound to maintain a ``minimum standard" of income, health and education of the population and to rectify by its actions the most glaring disproportions in these spheres. Occasionally, the functions of ``the welfare state" are more widely interpreted and they include general regulation of economic activity.^^1^^

Opposition to increasing government spending for social needs is very strong in certain political circles of the United States. As will be subsequently shown, these expenses are usually the first to be cut as soon as the need arises to increase the military, foreign aid and other related expenditures which in present-day conditions have unchallenged priority over everything else. Nor is it accidental that for many years spending for social needs in relation to total budget expenditures as well as to national income has been considerably lower in the United States than in other developed capitalist countries.'^^2^^

The characterisation given by the American economist, Harold L. Wilensky, is quite apt: ``Ours is a reluctant welfare state."^^3^^ Such a situation cannot be regarded as accidental. The public sector ``built into" the capitalist economy is subordinated to the general laws of this socio-economic formation. In the ``private''-``collective'' policy mix, private interests dominate. Moreover, social groups possessing wealth and power are exerting a great influence on the real political process which ultimately determines the economic measures of government agencies.

The inability of the capitalist state to solve urgent problems of economic and social development are sharply criticised by various sections of American society. Professor Martin Bronfenbrenner, chairman of the Department of Economics of the Carnegie-Mellon University, sums up the views of radically-minded circles in the US concerning the _-_-_

~^^1^^ Alfred J. Kahn, Theory and Practice of Social Planning, Russel Sage Foundation, New York, 1969, pp. 42, 43.

~^^2^^ See Richard A. Musgravc, Fiscal Systems, Yale University Press, New Haven and London, 1969, pp. 95, 360--61.

~^^3^^ Quoted after Albert J. Kahn, op. cit., p. 51.

36 capitalist system. He points to the equal distribution of income, wealth, and power within individual countries. In many countries too many resources are allocated to private goods consumed by the upper and middle classes, and to military goods, too little to public goods and services, used by the poor as routes to equalisation of income and wealths. Another aspect of misallocation is the ignoring of the set of social costs (externalities) involved in the term 'quality of life'---pollution, alienation, over-population, and resources exhaustion. He also mentions failure either to eliminate or greatly mollify racial discrimination.^^1^^

As we see, all this is linked to one degree or another with the budget, its structure, the dynamics of its main items and government fiscal policy. These specific ``financial'' questions which represent a definite aspect of the more general problems of development of capitalism are examined in subsequent sections of the book.

__ALPHA_LVL2__ 3. STRUCTURE OF PUBLIC FINANCE

Formally, the budget represents a group of tables which outline in smaller or greater detail the different items of revenue and expenditure. But, as pointed out earlier, these tables conceal the real mechanism of state power and the determination of the most important political decisions. No government programme can be implemented without appropriating the necessary funds. Aaron Wildavsky, a specialist on problems of political decision-making, offers the following characteristic of the US budget: ``Taken as a whole the federal budget is a representation in monetary terms of governmental activity. If politics is regarded in part as conflict over whose preferences shall prevail in the determination of national policy, then the budget records the outcomes of this struggle. If one asks, 'who gets what the government has to _-_-_

~^^1^^ See Martin Bronfenbrenner, ``Radical Economics in America: A 1970 Survey'', journal of Economic Literature, September 1970, Vol VIII No. 3, p. 749.

37 give?' then the answers for a moment in time are recorded in the budget. If one looks to politics as a process by which the government mobilizes resources to meet pressing problems, then the budget is a focus of these efforts."^^1^^

The government functions are thus specifically reflected in the budget structure. We shall analyse these functions in more detail in later chapters but shall confine ourselves in this section to a general characterisation of the features of the U.S. system of public finance.

The state financial system in the USA corresponds to the three-level structure of organisation of political power: the federal government, the state governments and the local governments. Correspondingly there are three levels of financial organisation---federal finance, state finance and local finance.

According to census statistics, the United States has more than 92,000 various government units, the overwhelming majority of which belongs to the lower, local level. Thus in 1962 total number of 91,158 government units included 3,040 counties, 17,144 towns and townships, 17,956 municipalities of big cities, 34,668 school districts and 18,301 other units (rural districts, police precincts, fire protection districts). Territorially the boundaries of these units do not coincide. Thus the residents of one county may belong to different municipalities, school districts, and so on. All these units secure their financing through taxes and excises, appropriations from higher level government, and the like, and they allocate these resources in the course of performing various functions within their jurisdiction. Each unit thus has its own financial draft plan which is included in the general category of local budgets. Units at a higher level---the state governments and the Federal Administration---also perform the full range of budget functions: collect taxes, spend money, issue loans. Such a structure of the financial system gives rise to the vast complex of intergovernmental financial relations and in addition requires considerable effort to co-- ordinate operations at different levels. Moreover, the relations between the financial system of the state, on the one hand, _-_-_

~^^1^^ Aaron Wildavsky, The Politics of the Budgetary Process, Little Brown and Company, Boston, Toronto, 1964, p. 4.

38 and the population and capitalist enterprises, on the other, are quite complicated.

Duplication of functions, multistage system of taxation, absence of precise criteria for the separation of financial functions of various governmental units---all this makes the USA financial system inflexible and leads to the lack of coordination in the work of separate parts of the state financial mechanism.

The principles governing the proportional distribution of tax receipts, collected by the state, among the various financial levels have become a most urgent political and social problem. The historically developed proportions, together with the steadily increasing share of the federal government, have ultimately led to a chronic financial crisis of the state and local governments and seriously restricted the possibilities of performing important social functions.

The growth of military spending at the end of the 1960s caused by the participation of the United States in the war in Vietnam had much to do with the origin of the crisis of state and local nances. Walter W. Heller, an American economist, notes that ``Vietnam, of course, has postponed the happy day when the hopes of the states for some new and generous form of federal financial support can be realized".^^1^^ The financial base of the state and local governments is extremely weak because of the specific tax structure which ensures a much smaller influx of revenue at the lower levels in comparison to the expanding requirements in additional funds for spending. ``At the Federal level,'' Heller writes, ``economic growth and a powerful tax system, interacting under modern fiscal management, generate new revenues faster than they generate new demands on the Federal purse. But at the state-local level, the situation is reversed. Under the whiplash of prosperity, responsibilities are outstripping revenues. As Galbraith has suggested, prosperity gives the Federal government the revenues, and the state and local governments the problems."^^2^^

The leading place occupied by the federal budget is _-_-_

~^^1^^ Walter W. Heller, New Dimensions of Political Economy, Harvard University Press, Cambridge, Mass., 1966, p. 120.

~^^2^^ Ibid., p. 118.

39 determined not only by the high share in revenue and expenditure operations but by the nature of the governmental programmes financed under this budget which exert a profound and multifarious influence on the country's economy, national economic policy and living standards of various groups of the population. The specific nature of the expenditure of the federal budget is shown in the following table (see p. 40).

Military spending occupies the leading place in federal expenditures. Together with US government spending of an international nature, it comprises 52 per cent of all the federal government expenditures and more than one-third of the total government spending at all levels. The second big item in the federal budget is interest payments on the general debt. As for education, public health and other social needs, their share in the federal budget is relatively small.

The multiplicity of functions of the contemporary state leads to multiplicity of fiscal operations. Correspondingly there are in use various budget concepts.^^1^^

For many years the term ``Federal Budget" was associated with the concept of the Administrative Budget. This concept is reflected in the Budgeting and Accounting Act of 1921 which authorised the US President to regularly submit to the Congress a bill on the allocation of the federal financial resources among the various governmental departments and agencies. The Administrative Budget consequently reflected the operations of institutions for which the US Congress regularly makes appropriations. At first this form of the budget fully embraced all types of governmental activity. But the situation changed in the 1930s when the so-called ``self-financing programmes" appeared which are not approved by Congress and are not included in the Administrative Budget. These programmes, most of which are covered by specially designated taxes and loans, include government social insurance funds and financial operations of a number of institutions controlled by the federal government. In the budget for the 1970 fiscal year these programmes were _-_-_

~^^1^^ The Federal Budget as an Economic Document. Prepared for the Subcommittee on Economic Statistics of the Joint Economic Committee, Congress of the United States, US Government Printing Office. Washington, 1962, Chapter Seven, pp. 109--28.

40 Table 1-4 Expenditures of the Federal, State and Local Governments, by function, for 1968 fiscal year Amount, million dollars Percentage distribution Function All governments Federal State Local All governments Federal State Local National defence and international relations 83,874 83,874 --- --- 35.5 55.2 --- --- Space research and technology 4,645 4,645 --- --- 2.0 3.1 --- --- Postal service 6,485 6,485 --- --- 2.7 4.3 --- --- Education* 43,614* 7,184 24,279 30,237 18.5 4.7 40.2 47.0 Highways 14,654* 4,464 1 1 ,848 4,713 6.2 2.9 19.6 7.3 Natural resources 9,200* 7,001 2,005 522 3.9 4.6 3.3 0.8 Health and hospitals 10,580* 3,751 4,203 3,806 4.5 2.5 7.0 5.9 Public welfare 11,245* 6,794 8,649 4,828 4.8 4.5 14.3 7.5 Housing and urban renewal 2,841* 1,995 103 1,614 1.2 1.3 0.2 2.5 Air transportation 1 ,360* 917 96 448 0.6 0.6 0.2 0.7 Social insurance administration 1 ,378* 1,363 606 --- 0.6 0.9 1.0 --- Interest on general debt 14,873 11,607 1,128 2,138 6.3 7.6 1.9 3.3 Other and combined 31,601* 11,909 7,478 16,087 13.4 7.8 12.4 25.0 Total 236,348* 151,990 60,395 64,393 100.0 100.0 100.0 100.0

* Aggregates exclude duplicative transactions between levels of government. Source- Statistical Abstract of the United States 1970, p. 407.

2 3 41 estimated at $54,900 million, that is, they made up more than cne-fouth of the entire expenditure of the federal budget.

The desire to more fully encompass and forecast government budget operations led to the employment of a wider concept, Consolidated Cash Budget. It registers all money receipts and payments between the federal government and the rest of the world, including operations not shown in the Administrative Budget. The specific feature of the Consolidated Cash Budget, besides fully encompassing financial operations, is that its combined totals (the excess of revenue over expenditure or deficit) determine changes in government borrowings.

A third concept of the federal budget became popular in the 1960s. It is connected with the analysing of the public sector as an integral part of the entire economic system. We refer to the National Income Account Budget which includes only the operations of the federal government connected with the current production of goods and services. For its range this concept of the budget is close to the Consolidated Cash Budget but has a number of specific features.

The parallel use of different budget concepts had great inconviniences. After working for several years a special body appointed by the President proposed an improved form, a Unified Budget.^^1^^ It is under this title that the federal budget has been compiled since the 1969 fiscal year.

The Unified Budget contains a considerably greater volume of information than the previous budgetary documents. It indicates the sums of new appropriations approved for the current year and the balance of appropriations remaining from earlier years; data on governmental credits to local authorities and foreign borrowers, the deficit of the budget and sources of covering it, changes in the cash balances of the Treasury, government loans. In size it is close to the Consolidated Cash Budget. Thus, in the 1969 fiscal year the Unified Budget revenues totalled $149,600 million, the Consolidated Cash Budget $153,600 million, the Administrative _-_-_

~^^1^^ Report of the President's Commission on Budget Concepts, US Government Printing Office, Washington, 1967.

42 Table 1-5 Federal Budget Receipts and Outlays, 1929--1973 (million dollars) 43 continued Fiscal year Receipts Outlays Surplus or deflci t 1965 116,833 118,430 -1,596 1966 130,856 134,652 -3,796 1967 149,552 158,254 -8,702 1968 153,671 178,833 -25,161 1969 187,784 184,548 3,236 1970 193,743 196,588 ---2,845 1971 188,392 211,425 -23,033 1972 197,827 236,610 ---38,783 1973 220,785 246,257 -25,472 Fiscal year Receipts Outlays Surplus or deficit Administrative Budget 1929 3,862 3,127 734 1930 4,058 3,320 738 1931 3,116 3,577 -462 1932 1,924 4,659 -2,735 1933 1,997 4,598 -2,602 1934 3,015 6,645 -3,630 1935 3,706 6,497 -2,791 1936 3,997 8,422 -4,425 1937 4,956 7,733 -2,777 1938 5,588 6,765 -1,177 1939 4,979 8,841 -3,862 Consolidated Cash Budget 1940 6,879 9,589 -2,710 1941 9,202 13,980 -4,778 1942 15,104 34,500 -19,396 1943 25,097 78,909 -53,812 1944 47,818 93,956 -46,138 1945 50,162 95,184 -45,022 1946 43,537 61,738 -18,201 1947 43,531 36,931 6,600 1948 45,357 36,493 8,864 1949 41,576 40,570 1,006 1950 40,940 43,147 ---2,207 1951 53,390 45,797 7,593 1952 68,011 67,962 49 1953 71,495 76,769 ---5,274 Unified Budget 1954 69,719 70,890 -1,170 1955 65,469 68,509 -3,041 1956 74,547 70,460 4,087 1957 79,990 76,741 3,249 1958 79,636 82,575 -2,939 1959 79,249 92,104 -12,855 1960 92,492 92,223 269 1961 94,389 97,795 -3,406 1962 99,676 106,813 -7,137 1963 106,560 1)1,311 -4,751 1964 112,662 118,584 -5,922

Note: For the 1971 fiscal year the table contains preliminary data on the actual fulfilment of the budget and for the 1972 fiscal year the draft.

Source: Economic Report of the President 1972, p. 269.

Budget $115,900 million; the expenditures respectively were $158,400 million, $155,100 million and $125,700 million; the budget deficit was $9,300 million, $1,500 million and $9,800 million.

With the introduction of the new category of the budget, the financial operations of the government were recalculated for a number of years including 1954 in accordance with the new system. For earlier years data of the Administrative and the Consolidated Cash Budget are used.

4. THE BUDGET-MAKING PROCESS

Before going over to a detailed analysis of budgetary revenue and expenditure and the long-range shifts in the structure of the major financial operations of the federal government (Chapters II-1V) and state and local authorities (Chapter VI), it is necessary to discuss in brief the budgetary process or the ``budget cycle" in the United States, i.e., the procedure of drafting, discussing and approving the budget. It would be wrong to think that this is a purely technical question. Here we deal with the essence of the intricate 44 mechanism employed in the making of political decisions in the USA. In the course of drafting the regular budgetary document, which takes many months, the aims and principles of the Administration's policy, its programme on major problems of development are clearly revealed. During this period various political forces and groups manoeuvre and clash. ``The size and shape of the budget,'' Wildavsky writes, ``is a matter of serious contention in our political life. Presidents, political parties, administrators, Congressmen, interest groups, and interested citizens vie with one another to have their preferences recorded in the budget. The victories and defeats, the compromises and the bargains, the realms of agreement and the spheres of conflict in regard to the role of national government in our society all appear in the budget. In the most integral sense the budget lies at the heart of the political process."^^1^^

In some American publications and textbooks on governmental finance the budgetary procedure in the USA is pictured as an integral part of the ``democratic system of government''. It is asserted that the budgetary document, elaborated in this way, best reflects the ``collective interests" of different groups and sections of American society. The authors of such works contend that only through political bargaining, conflict and compromise is it possible to assure ``equal representation" of different social groups and thus bring about a situation in which not one of them can impose its will and decisions on the majority. The budgetary procedure in the United States is held up in contrast to other budgetary systems, including the planned principles of determining the budget structure, as an expression of the supreme values of bourgeois society---competition and free, enterprise.

The question arises, whether the extremely cumbersome and time-consuming procedure of drafting the budget ensures the making of truly unbiased and rational decisions equally acceptable to all or at least to a majority of American citizens? Is the most efficient allocation of the financial resources accumulated by the government thus attained? Does the system of numerous hearings and discussions of the _-_-_

~^^1^^ Aaron Wildavsky, Op. cit., pp. 4-5.

45 budget by tens of Congressional committees and subcommittees effectively control the actions of the Executive? In other words, does all this ensure the checks-and-balances of the government, the system so much praised in textbooks, wherein the financial decisions of governmental agencies are controlled by the President, the operations of the President checked by Congress and the actions of Congress determined by the American people?

A discussion of these questions in the American press shows that it is impossible to give an affirmative answer to any of these questions. The American system of drafting and approving the budget is extremely wasteful in the sense of spending time and effort of governmental personnel; it in no way guarantees the economic rationality and the ``just and equal representation" of all sections and groups of American society. Moreover, this system creates the ground for abuses and is exceptionally beneficial for powerful Big Business groups. The inexpediency of the budgetary system and the scandalous cases of abuse have been so widely publicised in the press that the question of a major reform of budgetary procedure has for many years been repeatedly raised and discussed by financial experts and political leaders.^^1^^

And now a few words about the existing system. Under the American Constitution, the President has no right to spend a single cent before the sum is approved by a corresponding legislative act which provides for the appropriation of money for some concrete government programme. The budgetary process is divided into two big cycles: 1) Drafting of the budget document which is entrusted to the US President but is practically prepared by the staff of his economic advisers; 2) examination and approval of the budget by the US Congress.

_-_-_

~^^1^^ See on this question Jesse Burkhead, Government Budgeting, New York, John Wiley & Sons, Inc., London, 1956; Arthur Smithies, The Budgetary Process in the United States, New York, 1955; Charles E. Lindblom, ``Decision-Making in Taxation and Expenditure'', in Public Finances: Needs, Sources and Utilization. A Conference of the Universities---National Bureau of Economic Research, Princeton, 1961, pp. 295--334; Charles E. Lindblom, ``Policy Analysis'', The American Economic Review, Vol. XLV1II, No. 3, June 1958, pp. 298--312.

46

The American budgetary procedure differs essentially from that of other capitalist countries in that in the United States the original draft of the budget, as a rule, has very little in common with the finally accepted version. In Britain, for example, Parliament does not intervene in the budget-- making process---it either approves or rejects the bills submitted by the government, expressing in the latter case a vote of no confidence in the government. In the United States, however, the budget bill submitted by the President is repeatedly redrafted in Congressional committees and subcommittees.

The drafting of the budget starts long before the fiscal year begins (usually 18 months in advance).^^1^^ The heads of the government agencies and departments submit at the beginning of the preparatory period estimates of the material and manpower resources they need, and, on this basis, calculations are made of the necessary money appropriations. At this stage an important role is played by the Bureau of the Budget which is part of the Executive Office of the President. The main function of the Bureau of the Budget (in July 1970 it was renamed the Office of Management and Budget) is to evaluate the needs of departments, determine the necessary sums and draw up a draft of the planned budgetary expenditures. The head of this Office keeps in constant contact with the President and his economic advisers. That is why the final version of the budget bill reflects the President's ideas and preferences, his evaluation of political aims and of the prospective economic development. As for budget revenue, it is forecast by the Council of Economic Advisers on the basis of the prospects of change in economic activity. In January of every calendar year the President submits to Congress a Budget Message which sums up the main trends and features of financial activity of the government in the forthcoming fiscal year. The detailed budget document is attached to the President's Message.

The serious imperfection of the budgetary procedure is revealed already at this stage. Since the budget is not a part of a national economic plan in which the major elements _-_-_

~^^1^^ In the United States the fiscal year begins on July 1 of the current year and ends on June 30 of the next year, its name corresponding to the calendar year in which it ends. Thus the fiscal year beginning July 1, 1971, and ending June 30, 1972, is called the 1972 fiscal year. '

47 and proportions of the economic process are balanced and mutually linked together, co-ordination of different government programmes is exceedingly difficult. Departments do not have precise objective criteria and guidelines for determining the prospects for the development of various programmes.

In submitting applications for appropriations, the heads of departments follow the practice of ``squeezing out" as much money as possible. Congress, on the other hand, tries to curtail to the utmost appropriations for needs which are considered secondary. This bureaucratic game, in which the departments try to get more and the Congress to give less, does not ensure the best procedure for the allocation of financial resources. The entire budgetary cycle ultimately is linked with the making of three major decisions at the three main levels: how much to ask (departments and government agencies), how much to recommend (the Office of Management and Budget) and how much to approve (the respective committees in the Senate and the House of Representatives).

In principle the problem of evaluating and allocating budgetary appropriations is very intricate in itself. But under capitalism it is further complicated by the spontaneous nature of the production processes, the absence or a sufficient degree of coordination in the development of individual economic sectors, enterprises and regions. The lack of coordination is not eliminated and at times is even accentuated because of the employment of bureaucratic methods to coordinate the decisions of participants in the economic process. This is revealed with particular clarity during the allocation of budget appropriations when the purely mechanical procedure of curtailing programmes causes, in turn, a series of defensive measures by government departments and agencies designed to outwit the distributors of the government financial resources.

In these conditions the calculation process loses the nature of an economic process and assumes the character of a political game. In setting the requested sums the heads of departments are usually least of all guided by considerations of economic rationality, comparative costs and effectiveness, rather they act on the principle of ``what will go''. The general ``rules of the game'', elaborated by practical experience, 48 are usually taken into account. It is known, for example, that new programmes pass through Congress with much difficulty. Jf a programme, however, has been launched and is handed down from budget to budget over a number of years it is much easier to get appropriations for it even if its inefficiency has been revealed. An ``irrefutable'' argument usually employed is: so much has already been spent on the programme that its closing would mean an admission that the amounts spent had been wasted. At the same time it is very difficult to convince Congress to accept some new, perhaps even very important, programme. That is why departments resort to various artifices. For example, the real cost of a programme is originally underestimated in the hope that once it is accepted it will be possible in future endlessly to ``squeeze out" money from the Treasury for it. Thus Congress is deliberately misled as to the actual cost of a programme.

The situation in the Office of Management and Budget, whose staff sees its major task in reducing appropriation requests by departments and agencies of the Government, does not improve the efficiency of the present fiscal system. The true character of calculations made in this Office is clearly revealed by Wildavsky who cites in his book excerpts from his conversation over appropriations for the National Institute of Health (NIH). A Bureau of the Budget official admitted that there were no precise schemes for evaluating the needs of medical institutions. On the question of criteria by which the Bureau of the Budget determines appropriations, the official stated that a kind of mechanical approach was taken, such as leaving it at the same level as last year or last year's budget plus 10 per cent of new grants or simply a 10-per cent increase against last year.

When the President transmits the proposed budget to the Congress, each item of expenditure is examined by the House and the Senate twice. The first round is called `` authorisation" and means the approval of the programme itself; the second round is called ``appropriation'', that is, the allotment of necessary funds to fulfil the programme. Approval of the programme by no means implies that the appropriations will be automatically assigned for it. Strategic positions are held by the respective subcommittees in the House and the 49 Senate which ultimately make the major decision providing the programme with the necessary financial funds. Examination of the budget by Congressional committees ends with the adoption of the respective legislative acts (at present 13 regular appropriation bills are adopted). Each of them provides for the allocation of funds for implementing certain government functions (national defence, military construction, foreign aid, agricultural price support, etc.). Only after approval of the bill can the government department or agency write checks against the Treasury balances with the Federal Reserve System to make payments to its suppliers.

The procedure of examining and approving the budget in the US Congress was developed over a long period of time. It was elaborated in expectation that people through its representatives in Congress would effectively supervise government spending. Realities, however, proved to be far removed from these expectations. American writers often characterise the budget-making process as ``wasting time'', ``archaic'' and ``ineffective''.

Let us merely enumerate some of the most serious defects of this system.

1. Congress discusses not the budget as a whole but its separate sections or parts. Neither the House nor the Senate examine the budget in its entirety.

Thus recommendations on the structure of budget revenues are examined by three committees: the Committee of Ways and Means of the House of Representatives, the Senate Finance Committee and a Joint Committee on Internal Revenue composed of a few leading members of these two committees. The work of all these bodies is considerably hampered by the customary delay in approving appropriation bills which are examined in other Congressional committees. Changes in tax rates and the introduction of new taxes is a very difficult and long process. So the work of the committees approving budget revenues is practically unco-ordinated with the planning of budget expenditures. The task of financial planning is further complicated by the practice of approving only new appropriations for the forthcoming fiscal year, whereas the Administration can utilise unspent balances of appropriations approved from previous years.

The budget expenditure programmes are discussed in __PRINTERS_P_49_COMMENT__ 4---62 50 each chamber in two rounds in a fragmentary way. Initially, specific programmes are discussed at the hearings of the respective legislative committees of Congress. Altogether there are 33 such committees (18 in the House and 15 in the Senate). In addition each committee has numerous subcommittees where the main work of examining the programmes is done.^^1^^ Bills on specific appropriations are examined by full committees.

Finally all the differences between the House and the Senate are resolved through ad hoc conference committees. The discussion and approval of programmes takes many months.

The second round leads to the approval of appropriations. The bills are discussed at the hearings of the Appropriation Committees of the House and the Senate, which have 13 subcommittees in the House and 14 in the Senate. Each bill may be repeatedly discussed from subcommittee to committee and the final joint conference of the committees of the two Houses for the settling of differences is repeated.

It is clear that the fragmentary character of approving expenditures, and the lack of co-ordination in planning revenue and expenditure preclude a comprehensive approach to the budget as a single document.

In this connection plans to reform the budgetary procedure have been repeatedly proposed in order to improve co-ordination of action by different committees of Congress. As early as 1946 the Reorganisation of the Legislature Act contained a proposal for setting up a Joint Budget Committee composed of members of the revenue and appropriations committees of both Houses. But a year later this committee failed to function: powerful forces in Congress (especially in the House of Representatives) were opposed to this committee and paralysed its work. Heads of the subcommittees, who held key positions and disposed of appropriations, did not wish to lose their influence in the US political scene by transferring some important functions to the Joint Committee.

2. Discussions of appropriations are usually limited to one fiscal year, thus blurring the legislators' vision. Programmes _-_-_

~^^1^^ Committee for Economic Development. Making Congress More Effective, New York, September 1970, Appendix.

51 designated for many years operate chiefly in the military establishment. The result is that attention is concentrated primarily not on programmes in their entirety, nor on the fulfilment of a definite long-range economic task, but on the estimates of expenses of one or another government department for one year. It is clear that such an approach is by no means efficient.

3. Many American writers expose procedures which operate under the veil of a ``democratic discussion" of the budget and ``consideration of public interests''. The subcommittees discuss bills behind closed doors. Moreover, the process of decision-making in many of the subcommittees takes place under the dominating influence of the chairman or a group of members who hold their posts for many years. These legislators are often connected with ``pressure groups'', with powerful lobbies, and they are able to push through decisions they want or to block for many years the passage of unwanted bills. Here for example is what Jacob Viner, a well-known American economist whom it is difficult to suspect of a biased attitude to the US Congress, has to say on this point: ``There is ... the almost promiscuous and haphazard dispersal of power within each branch of the legislature, where the weakness of party discipline and the possession of nearly unlimited veto power and delaying power by the committee chairman, who acquire their posts by seniority regardless of the degree and quality of their ability, ... result in the process of legislation being largely subject to the idiosyncrasies and the special interests of a small group of men whose qualifications for meeting the heavier responsibilities they bear [whether it be qualities of ability or of character.---The Author.] are even more subject to the hazards of chance than the outcome of a horse-race or a football match. .. . The run-of-the-mill congressman or senator in initiating, delaying or modifying specific legislative proposals, which results in making extremely difficult and even impossible the attainment of coherence, timeliness, and self-consistency in the legislative processes as a whole and in making unduly important the role of the lobbyist for special interests, private or regional, who to attain his objectives, good or bad, often needs not the approval of the President or of the administration or

52

of the majority party as a whole or of national public opinion or of the press, but only the dedicated and not necessarily disinterested support of a small handful of free-- wheeling legislators."^^1^^

4. The central function of Congress as the ``controller of public funds" is undermined by the fact that a substantial part of the resources can be spent by government departments essentially without any control. This applies to many categories of ``self-financing programmes''. Furthermore, a discussion of the budget bill for the next fiscal year is only linked with approval of new obligational authority which do not contain the obligations of departments to spend this money and, what is most important, do not regulate the use of the ``outstanding balance" of unutilised appropriations of previous years. This not only reduces to naught the control functions of Congress but also prevents the ``closing out" of inefficient programmes approved by preceding Congresses. William Henderson and Helen Cameron point out: `` Congress may never really know how much money in toto it has appropriated for a particular function or agency and obviously cannot know the effects of an unknown expenditure pattern."^^2^^ The authors cite the following example: In the 1968 fiscal year with the administrative budget totalling $135,000 million, only $61,000 million (45 per cent) of all appropriations could be placed in the category of `` controlled''. Among the appropriations not subject to control are outlays under unutilised appropriations for previous years, expenditures under permanent programmes, expenditures of Government-owned enterprises, open programmes, liquidation of contracts, payments to trust funds and other operations.

5. What extremely complicates the procedure of adopting the budget in the Congress and results in a waste of time is the fact that at the beginning of the fiscal year government departments and agencies as a rule do not know what sum will be allotted to them for the coming year. Thus, by _-_-_

~^^1^^ Jacob Viner, ``The United States As a 'Welfare State' '', The Nation's Economic Objectives, Chicago University Press, Chicago, 1964, pp. 165--06.

~^^2^^ William L. Henderson, Helen A. Cameron, The Public Economy: An Introduction to Government Finance, New York, 1969, pp. 85--86.

53 July 1, 1969, that is, at the beginning of the fiscal year, not one of 13 regular appropriation bills was approved by Congress. At the beginning of August 1969, six bills passed through the House, two through the Senate, but not one was approved at the joint conference of committees where final agreement between the two Houses of Congress is reached. At the beginning of October, 1969, only one bill, covering altogether two per cent of the appropriations, was enacted and became law. Lastly, in March 1970, only four months before the end of the fiscal year, one bill, amounting to $19,000 million, was still not approved (it was vetoed by the President).^^1^^ The passage^of bills, requiring additional appropriations including expenditures for purposes not envisaged in the major bills, is even more delayed. One bill of this kind was signed by the President on July 22, 1970, i.e., three weeks after the end of the fiscal year.^^2^^

6. The President has the right to veto a bill and return it to Congress for repeated examination. But the peculiarity of this action is that a veto can effect only the entire bill and not some specific part or item. This creates another loophole for various abuses and the railroading through of appropriations beneficial for definite groups, corporations or individuals. Various items which obviously run counter to the public interest but which the President, as individual Congressmen hope, will be forced to accept in order not to reject the bill as a whole, are tacked on to a general bill that includes hundreds of items. Usually these hopes are justified.^^3^^

These and many other defects of the budgetary procedure are targets of withering criticism. But the fact that they are preserved shows that the complexities of this procedure are of advantage to some forces in American society and are products of the pattern and peculiarities of the entire political system. Attempts to improve the efficiency of the _-_-_

~^^1^^ Committee for Economic Development. Making Congress More Effective, p. 24.

~^^2^^ Ibid.

~^^3^^ Such a supplement to a bill is known in the lobbyist language as a ``rider'' (Troy J. Cauley, Public Finance and the General Welfare, Columbus, Ohio, 1960, pp. 17--18).

54 budgetary procedure by adopting and applying in practice normative criteria, are doomed because they irreconcilably contradict political reality, the system of organisation of political power in the United States. ``The budget,'' Wildavsky writes, ``is the lifeblood of the government, the financial reflection of what the government does or intends to do. A theory that contains criteria for determining what ought to be in the budget is nothing less than a theory stating what the government ought to do....

``A normative theory of budgeting would be a comprehensive and specific political theory detailing what the government's activities ought to be at a particular time. A normative theory of budgeting, therefore, is Utopian in the fullest sense of that word."^^1^^

Wildavsky lays bare the essence of the budgetary process, seeing it as an answer to the question, ``whose preferences are to prevail in disputes about which activities are to be carried on to what degree, in the light of limited resources. The problem is not only 'how shall budgetary benefits be maximized?' as if it made no difference who received them, but also 'who shall receive budgetary benefits and how much?'~"^^2^^ The author correctly points to the impossibility of finding a satisfactory solution to the problem of allocating budgetary funds in the conditions of the socio-political system existing in the USA. It is impossible to treat as a single collective with common aims, a society, in which classes and social groups are divided by irreconcilable contradictions. It is impossible to find ``a purely economic solution to the question" and to try to maximise the budgetary benefits irrespective of the problem of distribution of income, that is, without furnishing an answer to-the political question: for what groups (to be more exact, classes) one or another governmental measure is of benefit, who will gain and who will lose by its implementation?

In the early 1960s, a budget programming was for the first time instituted by the US Department of Defence on the initiative of Robert McNamara who was at that time Defence Secretary. A programme of long-term planning of the _-_-_

~^^1^^ Aaron Wildavsky, Op. cit., pp. 128--29.

~^^2^^ Ibid., pp. 129--30.

55 military expenditure was formulated at two levels: first, the drawing up of a five-year plan of the basic programmes and second, the planning of departmental weapons systems within each programme. The direct and indirect expenses for each section were calculated and the ``benefits'', if they can be called such, from the application of different alternative ``systems'', were evaluated.

In 1965 President Johnson decided to extend the planning-programming-budgeting system (PPB) to other governmental departments.^^1^^

Budget programming can promote a more precise determination of the efficiency of various programmes and thereby eliminate the most glaring absurdities of the present budgetary process. But it in no way changes the system of priorities and the existing procedure upon which the main political decisions are based: the chief criteria of the budgetary structure are already determined from the outside, regardless of the ``scientific'' recommendations and conclusions of experts. Behind-the-scenes pressure of powerful ``interest groups'', linked with the Congressional `` appropriation machine'', definitely precludes any possibility of optimising the US budgetary procedure.

_-_-_

~^^1^^ See Committee for Economic Development. Budgeting for National Objectives, A Statement by the Research and Policy Committee, January 1966, New York, 1966, pp. 21--22.

[56] __NUMERIC_LVL1__ CHAPTER II __ALPHA_LVL1__ FEDERAL BUDGET EXPENDITURE __ALPHA_LVL2__ [introduction.]

The enumeration of budgetary appropriations serves, as it were, as a distinctive mirror, in which the interrelations of the different political, economic and social functions of the federal government receives a precise quantitative reflection. Of interest in this respect are the changes in the structure of governmental spending in recent decades.

Throughout the post-war period the expenditures of the federal government linked with current military spending and past wars have, as a rule, exceeded the entire sum spent for civilian purposes. At present, as shown by Table II-1, more than two-fifths of the federal budget goes directly for military purposes. Another one-eighth of the budgetary appropriations is spent on benefits to war veterans and interest on the federal debt. Of the federal government's total debt of $367,000 million (at the end of the 1969 fiscal year) more than $220,000 million are for the period of the Second World War (1939--1945 fiscal years). Therefore not only veteran benefits and services but the bulk of the expense on the federal debt, represent financial burden connected with the military preparations in the preceding period. Thus, more than half of the total expenditure of the US federal budget is allocated for military purposes.

Until now periods of a steep rise in the federal budget were invariably marked by an increase in appropriations for military purposes. Thus, during the years of the Second 57 __MISSING__ Table. II-1 58 World War alone, budgetary spending greatly exceeded the total sum of military and civilian spending under the federal budget throughout the preceding history of the United States.

At the same time in the last 100 years the following feature of the federal budget was clearly revealed: in the peaceful periods which set in after the First and Second world wars military spending was invariably stabilised at a level which substantially exceeded the previous pre-war scale. Thus, after the First World War (1921--1925), the average of the US armed forces personnel was twice as high and the average annual military spending (calculated in unchanging, 1945, prices) was almost three times as much as before the war (1909--1913). After the Second World War (1947--1949), the strength of the armed forces increased almost six times and the current military expendinture, seven times as compared with the pre-war period (1935--1939). In the subsequent period this tendency was further accentuated. During the period of the escalation of the war in Indochina the total sum of military spending (taking into account the depreciation of the dollar) exceeded the expenditure of the federal government in waging the First World War. Mr. Dwight Eisenhower, who directly led the operations of the American forces during the Second World War and later became President of the USA, subsequently noted the tendency towards the steady growth of military preparations in peaceful years and pointed to the danger of the gradual conversion of the United States into a ``garrison state''.^^1^^

It goes without saying that to maintain the country's military preparedness at the same level in conditions of steadily developing inflation more money is needed. But the growth rate of the military expenditure is much higher than the growth rate of inflation. This is in the first place linked with the further build-up of the military potential. Thus, according to data of Professor Melman, in the 1964 fiscal year, close to two-fifths of the money spent for the purchase of armaments represented expenditures for the maintenance of military preparations at the former level, while three-- _-_-_

~^^1^^ New York Times, March 12, 1959, p. 12.

59 fifths were utilised for building up the striking power of the US armed forces.^^1^^ The swift stockpiling of weapons has always been fraught with the danger of truly disastrous consequences in the even of the unleashing of another way. Within the limits of the present chapter, primary attention is given to the sources and stimuli for increasing direct military spending. At the same time certain aspects of the spending policy of the federal government are examined. These aspects are linked with the needs of long-range economic growth.

__ALPHA_LVL2__ 1. MILITARY SPENDING
OF THE FEDERAL GOVERNMENT

The growth of US military spending throughout the 20th century has been determined above all by the system of priorities applied by the Administration in its activity, and the generally aggressive line of its foreign policy. Characteristically, programmatic statements made by the US Government in the first postwar years most often link Washington's role in settling disputed international questions with its increasing military might and the application of the policy ``from position of strength''. The military preparations of the US Government in recent decades have served as an important activator of a cumulative process in which every step toward more military spending is not only a consequence but also the cause of the further intensification of international tension.

In present-day conditions war and preparations for war make new demands on the national economy. The greater scale and intensity of the armed struggle dictate not only an increase in the numerical strength of the armed forces but also their equipment with increasingly more sophisticated weapons. The rapid development of research in the armaments industry enhances the dependence of a country's war potential riot only on the quantity of weapons but also on their quality.

_-_-_

~^^1^^ A Strategy for American Security. An Alternative to the 1964 Military Budget. Submitted by a Group of Independent Specialists, April 1963, p. 4.

60

The process of ever faster obsolescence of weapons is playing a particularly important role. Some studies and calculations show that no other sector of production is subjected to such frequent renewal and improvement as the manufacture of modern weapons.

The periods for the large-scale re-equipment of the armed forces are also being reduced. Thus, a special study made in the USA in 1955, revealed that the cycle for the complete re-equipment of armaments is on the average 14 years. A similar study made in 1959 disclosed a reduction of up to 10 years in the average life span of weapons.^^1^^ In view of this, the cost of armaments, annually written off by the military establishment as obsolete, is swiftly mounting. In present-day conditions various weapons and strategic materials are annually written off to the tune of $8,000--10,000 million annually. The prices of ``surplus'' stocks sold by the US Department of Defence, as a rule, amount only to 1-2 per cent of the price the Government originally paid for these materials.^^2^^

An increase in prices is one of the major factors making for the absolute growth in the scale of the budget. But, if prices of goods and services paid for by the government rise at the same rate as the general price level, all other conditions being equal, this cannot bring about a growth in the relative share of government spending.

Of interest in this respect, therefore, is a comparison of the dynamics of prices of purchased armaments with the general price index. In a period of 40 years after 1929 the deflator of prices of elements of the gross national product increased by 153 per cent, while the index of prices of goods and services bought by the federal government rose by 273 per cent. But, of the mass of goods and services paid for by the government, we are interested above all in the prices of armaments. For the period of the Second World War we can use data of S. Kuznets which relate directly to prices of war output. The index of prices for these goods rose by 62 per cent, while the general index of prices of all durable _-_-_

~^^1^^ Military Review, Vol. XLI, Number 6, June 1961, p. 6.

~^^2^^ Ladislas Farago, It's Your Money. Waste and Mismanagement in Government Spending, New York, 1964, p. 115.

61 goods rose by 36 per cent.^^1^^ After the conclusion of the war in Korea, between 1953 and 1969, prices of consumer durable goods in the United States rose on the average 12 per cent, of durable goods purchased by entrepreneurs, 38 per cent, and durable goods bought by the government, 43 per cent.^^2^^ At the same time the general level of prices of armaments in the United States is now considerably higher than that in Western Europe.

The particularly swift growth of armament costs is explained by a number of factors. First of all, armaments which are products of prolonged research and development, are characterised by ever greater sophistication and require increasing inputs of skilled labour. For example, to develop the B-17 military plane, used in the Second World War, 200,000 engineer man-hours were needed; to develop the B-52 bomber, 4.1 million hours were already required and the B-58, 9.3 million hours. As for the XB-70 (work on this bomber was completed in the mid-1960s), the input reached about 15 million hours.^^3^^ The amount of labour of engineers and technicians required for the development of missiles on the average is twice as high as that needed for the development of aircraft.^^4^^

The intricate nature of the scientific and technological problems which have to be solved in creating new types of weapons determines the long periods of their development. To this often are also added long debates in Congress concerning appropriations, the bureaucratic procedure in the military establishment, and so on. At the beginning of the 1960s, the period between the conclusion of a contract for the study of the possibilities of producing new aircraft and their regular manufacture, was about 11 years.^^5^^

_-_-_

~^^1^^ Simon Kuznets, National Product in Wartime, New York, 1945, p. 49.

~^^2^^ Calculated according to data of U.S. Income and Output, Washington, 1958; Survey of Current Business, July 1970.

~^^3^^ Aviation Facts and Figures, 195S, Aircraft Industries Association of America Inc., p. 48.

~^^4^^ See Business Week, January 10, 1959, p. 111.

~^^5^^ Merton J. Peck, Frederic M. Scherer, The Weapons Acquisition Process: An Economic Analysis, Harvard University Press, Boston, 1962, pp. 53--54.

62

At the same time the swift advance of science entails the rapid obsolescence of the developed weapon systems. As a result more and more models of weapons already become obsolete at the stage of research and development. According to spokesmen of the US Air Force, of each three elaborated projects ot new weapons, two are obsolete before their production is launched.^^1^^ Consequently, ever greater resources are spent for the development of weapons which turn obsolete even before they become operational.

Government contractors widely exploit these features of the manufacture of modern weapons for additionally raising the prices of goods sold to the government. The increase of prices is also facilitated by the fact that the military establishment, seeking to achieve better tactical and technical properties of new weapons, is little concerned with additional expenses. This further weakens the economic ``brakes'' which restrain the essentially endless process of development of new weapons. One scientific consultant of the US Air Force wrote that ``too much effort is being spent in getting a one per cent greater improvement at a 20 per cent increase in cost".^^2^^

In addition to these technico-economic factors, it is necessary to consider the structural characteristics of the arms market. The point is that the share of governmental enterprise in the production of weapons in the United States is very small: during the 1950s only 2 per cent of the primary military contracts issued by the US Government were filled at state-owned enterprises.^^3^^ This inevitably gives rise to the problem of enlisting private businessmen in sectors servicing the war industry.

In view of intensive scientific and technological progress as well as a number of political factors, the government's demand for specific types of weapons is marked by growing instability. In conditions of increasing uncertainty and risk, _-_-_

~^^1^^ See Department of Defense Appropriations for 1957. Hearings before the Subcommittee of the Committee on Appropriations, US Senate, 84th Congress, Second Session, Washington, 1956, p. 243.

~^^2^^ George E. Vallev, ``Pentagon Profile'', Armed Forces Management, Washington, April 1958, p. 19.

~^^3^^ Planning and Forecasting in the Defense Industries, Ed. by J. F. Stockfish, Belmont, Calif., 1962, p. 145.

63 large corporations undertake the development of a new weapon and its manufacture only when the prices seem sufficiently profitable to them. Moreover, in view of the swift change of weapon models, private firms refuse to make big investments in the most specialised parts of the productive machine of the war industry, in highly capitalised factories of its new branches, and so on. Large corporations in respective industries usually possess sufficient resources for buying all the necessary equipment.^^1^^

But they prefer to shift to the government (that is, ultimately on the taxpayers) most of the increasing commercial risk. Specialised re-tooling at the expense of the government is now becoming one of the main conditions for the migration of capital into the war industries.

While during the First World War approximately onetenth of the expense for building industrial enterprises was financed by the state, during the Second World War already about two-thirds of the total sum of investments in manufacturing industry were made with the government's money.^^2^^ During the post-war years the US Department of Defence financed the building of a number of new specialised productive units. The government's property leased to private contractors working for the US Department of Defence was valued at about $15,000 million in the mid-1960s.

The role which productive units, leased from the federal government, play for some private companies can be judged by the following data. A group of contractors, 12 aerospace companies, utilise government plants worth $895 million, possessing their own facilities with an original cost of $395 million.^^3^^

_-_-_

~^^1^^ ``Though much of this equipment has been special-purpose equipment, contractors might well have purchased it with their own funds if they had had a positive incentive [!] to make the investment" ( Harvard Business Review, January-February 1958, Vol. 36, No. 1, p. 134).

~^^2^^ See John M. Blair, Harrison F. Houghton, Matthew Rose, Economic Concentration and World War II, Washington, 1946.

~^^3^^ Aircraft Production Cost and Profits, Hearings before the Subcommittee for Special Investigations. Committee on Armed Forces, House of Representatives, 84th Congress, Second Session, Washington, 1956, p. 3114. Cited from Merton J. Peck, Frederic M. Scherer, 'The Weapons Acquisition Process: An Economic Analysis, Boston, 1962, p. 166.

64

The very terms of military contracts promote concentration in war production. Thus, in the atomic industry, only 1-3 contractors had a production potential for performing the required technical tasks.^^1^^

In shipbuilding only three or four private firms could, from the viewpoint of the military establishment, undertake to develop nuclear-powered submarines. In the production of missiles the main stages of manufacture are monopolised by two to four of the biggest companies.^^2^^

This procedure can also be observed in the market for the sale to the government of some goods which are not of an exclusively military purpose, for example, strategic raw materials. Thus, one company supplied nickel and two companies provided 85 per cent of all the lead to the federal government.^^3^^

A total of 50 biggest private concerns received from the government about 58 per cent of all the military contracts during the Second World War (1940--1944); over 56 per cent during the war in Korea (1950--1953) and 63--65 per cent in the first half of the 1960s.^^4^^

The specific structure of the arms market imparts a definite imprint on the forms of contracts concluded by the big corporations with the government. The 1947 Act gave the military establishment broad powers as regards the choice of the form of agreement with contractors.^^5^^

_-_-_

~^^1^^ Richard A. Tybout, Government Contracting in Atomic Energy, The University of Michigan Press, Ann Arbor, 1956, p. 98. Let us confine ourselves to the following example: at the beginning of the 1960s bids were called for the manufacture of an atomic reactor. After a preliminary ``screening'' of the 28 companies which offered their services, only three were left: Lockheed, General Dynamics, and Martin-- Marietta, which are among the biggest governmental contractors (See Wall Street Journal, January 30, 1962; ibid., May 18, 1962).

~^^2^^ See Planning and Forecasting in the Defense Industries, p. 152.

~^^3^^ Richard L. Worsnop, ``Government Stockpiling'', Editorial Research Reports, Vol. II, No. 8, 1962, Aug. 22, p. 622.

~^^4^^ William L. Baldwin, 'The Structure of the Defense Market, 1955-- 1964, Duke University Press, Durham, N.C., 1967, p. 9.

~^^5^^ Having signed this Act President Truman remarked that it permitted the armed forces in peacetime ``to use any form of negotiated contract''. See Arthur Smithies, The Budgetary Process in the United States, New York, 1955, p. 298.

65

The spread of new forms of contracts, associated with large-scale research and development work, essentially restricted the traditional process of contract-bidding through free competitive bids. At present military products are overwhelmingly purchased by the government without any competitive bidding, by way of direct negotiation with the largest corporations. Thus, in the 1968 fiscal year as a result of negotiations with only one firm, military contracts were awarded totalling 57.9 per cent of the value of all contracts; moreover, 30.6 per cent were placed through negotiations in which several firms could participate and only contracts comprising 11.5 per cent of the total value were awarded on the basis of free competitive bids.^^1^^

Among the barriers preventing the entry of new companies into weapons production are a number of governmental provisions for the conclusion of contracts along ``package deal" lines, the limited circle of companies given permission to do classified work and the role of preliminary contracts for the development of new types of weapons.^^2^^

Professor Lanzillotti, a well-known expert on industrial organisation, points out that there is a ``defense contract policy which leans heavily on oligopolistic firms'',^^3^^ and B. Cochran notes that in the sphere of weapons production monopoly relations are more fully realised than in the civilian economy.^^4^^

The scale of overpayments linked with the restriction of competition and the spread of the oligopolistic practice in _-_-_

~^^1^^ New York Times, November 12, 1968.

~^^2^^ ``Once a contractor has been selected to develop a new weapons system or subsystem, it is in an extremely advantageous position with respect to receiving subsequent contracts to produce the system. . . . The practise of eliminating some firms from consideration on the basis of past experience or existing capabilities, either before or after bids are requested, constitutes a potential barrier to entry into the weapons industry" (Merton J. Peck, Frederic M. Scherer, The Weapons Acquisition Process: An Economic Analysis, pp. 325, 355).

~^^3^^ Robert F. Lanzillotti, ``Some Characteristics and Economic Effects of Pricing Objectives in Large Corporations. The Relationship of Prices to Economic Stability and Growth'', Compendium of Papers Submitted by Panelists Appearing before the Joint Economic Committee, March 31, 1958, Washington, 1958, p. 453.

~^^4^^ Bert Cochran, The War System. An Analysis of the Necessity for Political Reason, New York, London, 1965, p. 142.

66 price formation is demonstrated by the following fact: surveys have shown that free competitive bids enabl