ernment gets paid back for the loan that it extended or it assumes the product in exchange for giving the loan.

So, we put that on the budget as a gross amount, and never credit back either the payment that is made against it or, No. 2, the forfeiture of the product. I think that what that does is inflates the budget figures, for example, for agriculture. I am worried the same thing will happen when we put the Federal Financing Bank on the budget with respect to the functions it performs for the rural electric co-ops and others.

Would you respond to that?

Mr. KUDLOW. Yes; I may not be familiar with all of the agriculture programs, but in a general sense, we account for the repayment. That is part of our exercise.

Mr. DORGAN. In the budget?

Mr. KUDLOW. Yes; the outlay effect is net of repayments.

The other issue is again strictly an accounting issue. My concern is that because we are not properly accounting for many of these FFB lending activities, they are growing rapidly and loans are not being repaid. The net effect is, we are increasing loan activity. After repayment is taken into account, we are still incurring new obligations. It is a big problem.

Many economists ignored this loan area for years in the postwar period of the fifties and sixties. The general view was loans are going to be repaid. Therefore, we really did not deal with loans except establishing policy to provide some shortrun funds. However, by the time we get to the late sixties, the seventies and the early eighties, loans are not being repaid. As some of the data in this testimony indicates, what we are seeing is expansion, expansion, expansion on a net basis. This is really the big problem.

Mr. DORGAN. I understand that. I understand that that is a method of increasing expenditures, not showing it on the Federal budget, and that is a problem. I am sympathetic with the reasons that you have brought it to the committee, and sympathetic with the reasons that the bill was proposed.

I, however, am a little concerned about moving very fast on this kind of legislation, because I want to know what in the long term it means for the rural part of America, because the Federal Financing Bank has been very important to us, and putting that on the budget in a way that, at least from the authorization side, makes it look like we are spending a ton of money that we are not really going to spend in net terms, I think, could injure some of the programs for rural America that are very important to us.

I would like, with your indulgence, to ask you a question in line with the type of questioning I asked the Assistant Secretary. You know, the notion of the Federal debt is something that has been discussed and discussed by both political parties. We all kick it around. It has been a football that happens to fly in whichever direction is most advantageous, I suppose, but we have always talked about the Federal deficit in terms of, well, so and so is to blame for having a $40 billion Federal deficit, or so and so is to blame for having a $25 billion deficit, or this administration or that Congress or this Speaker is to blame for a $55 billion Federal deficit.

The problem is, we are not arguing about that any more. Now we have a Federal deficit-this year it is going to be $212 billion. In

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my opinion, clearly it is out of control, and the discussions even in brief form this morning have been, well, the problem is on the spending side. The 3-year tax cut that we adopted will drive revenues from 21 percent of GNP in 1981 to 18.7 percent in 1985.

The problem is not just on the spending side. The problem is also on the revenue side, clearly. George Will, for example, maintains that, and many others maintain it, but it is there in the numbers in black and white. When you decrease your revenue base as dramatically as we have as percent of GNP, and call for increases in some of the major components—we have held down very dramatically the increases in the payments to individuals, incidentally, many of the transfer payments, but when you do not deal with that revenue side-how on Earth can you restore credibility to the fiscal program, and how can you ever deal with that deficit?

Even if conditions improve and we have some sort of moderate recovery, it is estimated the Federal deficit is going to be $200 billion out through the late 1980's, and my feeling is, I do not want to sit here in Congress and keep supporting debt increases for your fiscal programs that do not work.

And so, why would you ask me as a member of this committee to support an extension of the debt level if your administration is not willing to help restore part of the revenue base that was washed away?

Mr. KUDLOW. Well, I think the administration view, dating from the submission of the budget, is that we presented a package that was balanced. We coupled spending reductions in various programs on the one hand with certain revenue measures, in this particular case, the contingency tax proposal on the other hand.

I believe the President and the senior economics people felt that this was a balanced package which, under the circumstances, listening to Members of Congress, was the best we could do. That is a judgment that either will hold or will not hold. Time will tell, and the time is fast approaching. But I believe that the view was that there was a balance and that we did deal with the revenue issue. In terms of the third year of the tax cut or indexation, which have received a lot of attention, as everyone knew they would, our view was that we could enhance revenues while leaving those measures alone. We could seek revenue strengthening elsewhere. And I think there may be revenue strengthening measures that have not really entered the mainstream of the debate. These alternatives could be employed and it would still be possible for reasons of economic efficiency and investment in capital formation, to maintain the third year tax cut and indexation.

But I will say this on the general question. As I responded in an earlier question about the recovery, I am very optimistic about the recovery in 1983, and I am developing more and more optimism about sustaining the recovery in 1984. However, with respect to the question of deficits in the out years as the recovery cycle keeps up if these Federal credit demands are left unabated, then I can only say as far as a sustained recovery is concerned, this fiscal problem and borrowing problem is our Achilles' heel.

I recognize that. I think we all recognize it.

Mr. DORGAN. I appreciate your answer. Let me just say that optimism is not a new commodity in the administration. We have been

living with that for a couple of years, while the Federal deficit has moved from $45 billion, $50 billion to $212 billion, and I will tell you, there is a certain irony, and I hope you see the irony in the fact that we had someone on the Capitol steps only about 5 months ago saying, we want to change the U.S. Constitution to require that Congress down there to adopt a balanced budget.

And then you come to us and say, but we want the Federal deficit this year of $189 billion, and we want a fiscal program that most experts, including your own administration experts, acknowledge will not balance the budget in the foreseeable future, and we see grocery carts hauled out in front of the Capitol here saying that what these folks really want to do is increase your taxes by $3,000, and we are talking about the increase in the Federal deficit, the increase in the Federal debt between 1981 and 1984 of $2,000 for every man, woman, and child in the country.

I guess my concern is simply to say I do not know whether I as a Member of Congress want to keep automatically authorizing increases in the Federal debt unless we are willing to work between the Congress and the administration to say that this is craziness. We have got to have a balanced fiscal program and a balanced monetary program working together to achieve goals that we all understand. Simply live on optimism while we continue to enact increases in the debt limit is, I think, trying to fool America, and the people out there in the country are not fooled. They do not want increases in the debt limit. They want some balance in fiscal policy.

I happen to know that you could not submit a balanced budget this year. You know it, too. You could not because it would wreck the economy if you tried to do that in 1 year, unless you wanted to completely eliminate the Defense Department or do something dramatic that would wreck the country's security.

But you know you cannot do it. We know you cannot do it. And there is a certain irony in the kind of theatrics that have been going on in the last couple of years, and then coming back to us and saying, but let us do the responsible thing to keep funding these programs.

So I am just telling you my feeling as a Member of Congress about the increase in the debt ceiling. I do not think there ought to be an automatic extension without some accommodation in fiscal policy that gets back to a moderate course rather than what I think has been some amount of faith healing in economics.

Mr. RANGEL. Mr. Pease?

Mr. PEASE. Thank you.

I appreciate the opportunity to come back for a second. Mr. Kudlow, I hope that the fact that you are here and that Mr. McNamara was here instead of the Secretary and David Stockman does not indicate a lack of commitment on the part of the administration to this bill. I was hoping to talk to Mr. Stockman, because 2 years ago when he testified I pointed out that during the 4 years that he was one of our colleagues, he never did vote for an increase in the debt limit.

I asked him why, what was different this time, and he said:

Mr. Pease, that is not an easy question to answer. If I can answer it with some conviction, I voted against those debt ceiling increases because I got no confidence

whatsoever that anyone was developing a fiscal plan that would bring spending deficits under control and avoid the need for constant increases in the future.

If we go by his criterion, can we have any confidence now that this administration has developed a plan to bring "spending deficits under control?"

Mr. KUDLOW. Well, we believe we have. We believe that, as I said, the initial budget submission and our various follow-through efforts at compromise and communication move the process in the direction to which we all want it to end. Beyond that, it is very difficult for me to give you the kind of assurance you want, and I think you and I understand the dynamic nature of this whole process and the difficulties ahead.

We are trying to advance the cause of fiscal soundness. We know why. Everybody knows why. The fate of the economy, at least in the long run, hangs in the balance, and we are trying to do what we can. Mr. Stockman was unable to attend this morning because he had another congressional commitment. He wanted to come, but he could not make it. And I am sorry, you will have to take the small fish rather than the bigger fish because of scheduling problems.

Mr. PEASE. Thank you.

Mr. JENKINS [presiding]. Are there further questions for this witness? [No response.]

If not, Mr. Kudlow, I want to thank you for your testimony.

At this time, Senator William Proxmire. Senator Proxmire, we are delighted to have you before the committee, and you may proceed as you desire.

STATEMENT OF HON. WILLIAM PROXMIRE, A U.S. SENATOR FROM THE STATE OF WISCONSIN

Senator PROXMIRE. Thank you very much, Mr. Chairman. Mr. Chairman, I want to congratulate you for holding these hearings on the Federal Financing Bank. There are probably not many people who have even heard of the Federal Financing Bank. It is a relatively obscure unit of the Treasury that operates outside the Federal budget, has no tellers, no windows, no pillars, not even listed in the phone book. It has only seven full-time employees, and yet it holds over $125 billion in loans.

In just 9 years, it has become the biggest bank in the United States. The bank was formed in 1973 to provide cheaper financing for Federal credit programs. It does this by borrowing money from the Treasury and reloaning at a rate slightly above the Treasury rate.

Why was the bank put outside the budget? Treasury argued it should be off-budget so as not to affect the budgetary status of any Federal credit program. Off-budget programs financed through the bank would then remain off-budget. Likewise, on-budget programs financed through the bank would continue on-budget.

Congress accepted the Treasury's recommendation with virtually no discussion. The budgetary treatment of the bank was consistent with the view that the bank should merely be a mutual financing vehicle for Federal credit programs. The Congress did not expect the bank would either encourage or discourage the growth of these

programs. Despite these expectations, the bank has been a key factor, a key factor in the explosive growth of Federal credit programs. By opening new opportunities for off-budget financing, it has become much more than a neutral financing vehicle.

For example, a federally guaranteed loan can be converted into an off-budget direct loan simply by selling it to the Federal Financing Bank. Likewise, a Federal agency can offset the entire cost of its loan program by selling loans to the bank. That feature has made the bank increasingly attractive to the managers of Federal credit programs.

If we exclude federally sponsored agencies, nearly 40 percent, 40 percent of all Federal credit programs are now financed through the Federal Financing Bank. Over the last 5 years, the bank's outstanding loans increased at an annual rate of 29 percent, or more than twice as fast as the increase in on-budget programs. The rapid growth of Federal credit programs has diverted an increasingly larger share of our national savings away from productive investments in the private economy.

In 1977, Federal credit programs absorbed 12 percent of the total amount of credit available in the economy. By 1982, Federal credit programs claimed 22 percent. If the deficit is included, the Federal Government claimed 49 percent of total credit, and in 1983 the percentage could exceed 75 percent, so it is no wonder that interest rates have remained so high.

Because of the explosive growth in Federal credit programs, I believe the time has now come to put the operations of the Federal Financing Bank in the budget. I have introduced a bill to do this along with Senator Slade Gorton of Washington. Congressman Bill Gradison has introduced a similar measure in the House. Hearings on the legislation were held on April 5 by the Subcommittee on Federal Credit Programs of the Senate Banking Committee. At this time the legislation was supported by the Treasury, the CBO, and the GAO.

Senator Paul Trible, the chairman of the subcommittee, has indicated his support for the concept, and is planning to introduce his own bill shortly.

I am hopeful that the record of these hearings will demonstrate the need for this legislation.

There are two fundamental reasons why I believe the Federal Financing Bank should be in the budget. First, excluding the bank from the budget gives a false and inaccurate picture about the true size of the Federal Government and its budget deficit. Second, the off-budget status of the bank distorts the allocation of resources by allowing Federal credit programs to escape the discipline of the appropriations process.

Mr. Chairman, I again congratulate you for calling these hearings, and I hope you will move forward quickly with the legislation when the hearings have been completed. Thank you.

Mr. JENKINS. Thank you very much, Senator, for your statement. Mr. Gradison?

Mr. GRADISON. Thank you, Mr. Chairman.

Mr. Chairman, about a year ago, when another debt ceiling increase was before us, I raised questions about the desirability of such legislation and offered a bill. The chairman of this committee