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THE DEFENSE PROGRAM AND THE ECONOMY HEARINGS BEFORE THE SUBCOMMITTEE ON ECONOMIC GOALS AND INTERGOVERNMENTAL POLICY OF THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETY-SEVENTH CONGRESS FIRST AND SECOND SESSIONS PART 1 OCTOBER 7, 13, 22, AND 29, 1981, AND DECEMBER 15, 1982 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 9-760 WASHINGTON:.1983 JOINT ECONOMIC COMMITTEE (Created pursuant to see. 5(a) of Public law 304, 79th Cong.) HOUSE OF REPRESENTATIVES SENATE HENRY S. REUSS, Wisconsin, Chairman ROGER W. JEPSEN, Iowa, Vice Chairman RICHARD BOLLING, Missouri WILLIAM V. ROTH, Ja., Delaware LEE H. HAMILTON, Indiana JAMES ABDNOR, South Dakota. GILLIS W. LONG, Louisiana STEVEN D. SYMMS, Idaho PARREN J. MITCHELL, Maryland PAULA HAWKINS, Florida FREDERICK W. RICHMOND, New York' MACK MATTINGLY, Georgia CLARENCE J. BROWN, Ohio LLOYD BENTSEN, Texas MARGARET M. HECKLER, Massachusetts WILLIAM PROXMIRE, Wisconsin JOHN H. ROUSSELOT, California EDWARD M. KENNEDY, Massachusetts CHALMERS P. WYLIE, Ohio PAUL S. SARBANES, Maryland JAMES K. GALBRAITH, Executive Director BRucE R. BARTLETT, Deputy Director SUBCOMMITTEE ON ECONOMIC GOALS AND INTERGOVEBNMENTAL PoLIor HOUSE OF REPRESENTATIVES SENATE LEE H. HAMILTON, Indiana, Chairman LLOYD BENTSEN, Texas, Vice Chairman RICHARD BOLLING, Missouri PAULA HAWKINS, Florida STEVEN D. SYMMS, Idaho MACK MATTINGLY, Georgia 1 Representative Richmond resigned from the U.S. House of Representatives on Aug. 25, 1982, and Representative Augustus F. Hawkins, of California, was subsequently appointed to the committee on Sept. 23, 1982. CONTENTS WITNESSES AND STATEMENTS WEDNESDAY, OCTOBEB 7, 1981 Reuss, Hon. Henry S., chairman of the Joint Economic Committee: Open- Page ing statement ------------------------------------------------- 1 Weidenbaum, Hon. Murray L., Chairman of the Council of Economic Advisers ----------------------------------------------------- 5 TUESDAY, OcTOBER 13, 1981 Hamilton, Hon. Lee H., chairman of the Subcommittee on Economic Goals and Intergovernmental Policy: Opening statement -------------------- 39 Schultze; Charles L., senior fellow, Brookings Institution, and former chairman of the Council of Economic Advisers ---------------------- 41 Brown, George F., Jr., vice president, Data Resources, Inc., Washing- ton, D.C ---------------------------------------------------------- 67 Gansler, Jacques S., vice president, the Analytical Sciences Corp., Arling- ton, Va., and former Deputy Assistant Secretary of Defense for Mate- rial Acquisitions--------------------------------------------------- 81 THURSDAY, OCTOBER 22, 1981 Hamilton, Hon. Lee H., chairman of the Subcommittee on Economic Goals and Intergovernmental Policy: Opening statement ------------------- 133 Rivlin, Hon. Alice M., Director, Congressional Budget Office, accompanied by Robert Hale and Larry Forest ---- ----------------------- 134 Schwartz, Gail Garfield, president, Garfield Schwartz Associates, Economic and Development Consultants, Washington, D.C ----------------------- 167 Wenglowski, Gary M., partner and director of economic research, Gold- man, Sachs & Co., Philadelphia, Pa ------------------------- 182 THURSDAY, OCTOER 29, 1981 Hamilton, Hon. Lee H., chairman of the Subcommittee on Economic Goals and Intergovernmental Policy: Opening statement ------------------ 203 Thurow, Lester C., professor of management and economics, Massachu- setts Institute of Technology, Cambridge, Mass -------------------- 206 Capra, James R., senior economist of the Federal Reserve Bank of New York, New York, N.Y ------------------------------------- 223 Borsting, Hon. Jack R., Assistant Secretary of Defense-Comptroller, accompanied by John W. Beach, Director for Plans and Systems, Office of the Assistant Secretary of Defense-Comptroller; and John A. Mittino, Director, Material Acquisition Policy, Office of the Deputy Undersecretary-Acquisition Policy, Office of the Undersecretary of Defense for Research and Engineering --------------------------- 258 WEDNESDAY, DECEMBER 15, 1982 Hamilton, Hon. Lee H., chairman of the Subcommittee on Economic Goals and Intergovernmental Policy: Opening statement ------------------- 283 Weidenbaum, Murray L., professor of economics, Center for the Study of American Business, Washington University, St. Louis, Mo ------------- 284 Eckstein, Otto, professor of economics, Harvard University, Cambridge, Mass., and president, Data Resources, Inc., Lexington, Mass -.----- 305 (III) SUBMISSIONS FOR THE RECORD WEDNESDAY, OCTOBER 7, 1981 PagE Hawkins, Hon. Paula: Written opening statement ---------------------- 3 Weidenbaum, H~on. Murray L.: Prepared statement-------------------- 13 TUESDAY, OCTOBEB 13, 1981 Brown, George F., Jr.: Prepared statement-------------------------- 71 Gansler, Jacques S.: Prepared statement------------------------------------------- 85 Press release from the House Wednesday Group entitled "Congres- sional Report Proposes Measures To Strengthen Defense Base," dated October 21, 1981, with an enclosure--------------------- 112 Hawkins, Hon. Paula: Written opening statement--------------------- 40 Schultze, Charles L.: Prepared statement---------------------------- 47 THURSDAY, OcrOBER 22, 1981 Rivlin, Hon. Alice M., et al.: Prepared statement, together with an addendum -------------------------------------------------------- 139 Schwartz, Gail Garfield: Prepared statement------------------------ 172 Wenglowski, Gary M.: Prepared statement -------------------------- 187 THURSDAY, OCTOBER 29, 1981 Borsting, Hon. Jack R., et al.: Prepared statement, together with graphs ------------------------ 261 Response to Representative Hamilton's request to supply for the record additional comments regarding former Deputy Assistant Secretary of Defense for Material Acquisitions Jacques S. Gansler's testimony at the October 13, 1981, hearing ---------------------- 276 Capra, James R.: Prepared statement ------------------------------ 229 Hawkins, Hon. Paula: Written opening statement -------------------- 204 Thurow, Lester C.: Prepared statement ---------------------------- 210 WEDNESDAY, DECEMBEB 15, 1982 Eckstein, Otto: Prepared statement -------------------------------- 308 Weidenbaum, Murray L.: Prepared statement ------------------------ 288 POINTS OF INTEREST WEDNESDAY, OCTOBER 7, 1981 No doves in Reagan administration _--------------------------------- 5 Inflationary impact of the defense budget ---------------------------- 5 The need for stronger defense --------------------------------------- 6 Is the defense budget inflationary? ------------------------------------ 8 Composition of military spending in procurement and manpower -------- 8 Procurement and "sectoral inflation"--------------------------------- 9 Military manpower_-------------------------------------------------- 10 Administration strongly supports the concept of an all-volunteer military- 11 Administration's defense program will weaken our economic security by contributing to inflation -------------------------------------------- 29 Weidenbaum claims no monetary phenomenon due to military buildup.-- 31 Administration's use of the so-called GNP deflator --------------------- 34 Excessive inflation rate of DOD procurement------------------------- 35 TUESDAY, OCTOBER 13, 1981 Economic effects of the defense budget--------------------------------- 41 Specifies of the defense buildup---------------------------------------- 43 Consequences of attempting to double defense procurement and R. & D____ 45 Difference of defense expenditures under the Carter and Reagan program-- 62 Impact on inflation of the Reagan defense budget ----------------------- 62 Real costs in the Reagan defense program ---------------------------- 63 TUESDAY, OCTOBEB 13, 1981-Continued Page Capacity in the defense industry ------------------------------- 63 How high would the defense budget have to rise to get inflation? ---------- 64 Tax increase -------------------------------------------------- 64 Difference in DOD and GNP price deflators --------------------- 65 Experience with defense budgets ----------------------------- 65 Budget authority figure ------------------------------------------ 66 Bottlenecks in the defense industry --------------------------------- 66 The Reagan administration's economic policies-------------------------- 67 Rationale of supply side economics--------------------------------- 67 Higher rate of inflation in the defense sector------------------------- 104 Major impacts of the Reagan administration's rapid defense buildup 105 Higher inflation rate in the defense sector than in the overall economy 106 10 commandments on defense production ---------------------------- 107 DOD comprehensive information system ---------------------------- 109 Leadtime and bottleneck problems --------------------------------- 109 Corrective action of leadtime and bottleneck problems ------------------- 110 Shortage of trained workers ------------------------------------------ 110 THURSDAY, OcrOBER 22, 1981 Sectoral effects of the defense buildup --------------------------------- 135 Confidence in OBO data --------------------------------------------- 159 Defense buildup to be smooth and well planned ----------------------- 159 Confidence in DOD projected figures------------------------------ 160 M-1 tank unit price jumps 76 percent ----------------------------- 160 Defense procurement bottlenecks---------------------------------- 161 CBO's projections based on Congress enacting administration's nondefense budget
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