willing to tax ourselves sufficiently to prevent inflation. But we should, it seems to me, not go in the other direction of unbalanced budgets until such time as we have reduced the interest rates; until we have stimulated as much as possible the investment sector of the economy. Representative MILLS. Mr. Ture has a question or an observation. Mr. TURE. I wonder whether this distinction, that I think all of you are agreed upon between social priorities and stabilization characteristics in a Government spending program, in all cases is as sharp as you have suggested. Let's take the case of capital investment by the Federal Government in, say, dams, highway projects, and so forth. These are the cases of capital expenditures to which you can attribute some sort of income stream, the present value of which you presumably can find by applying the appropriate discount rate. We had a discussion yesterday afternoon as to what the appropriate rate was. If this rate is, as Professor Harberger suggested, geared to the average return on alternative investment opportunities throughout the economy, this rate will presumably rise during periods of rising levels of activity, and it will tend to fall or decrease during falling levels of activity. What this rate does, in effect, is to help you measure the social priority of such and such a program as compared with a lot of alternative uses of the funds required, including private uses. Suppose, in a period of rising activity, perhaps because of an increased level of defense demands, you come across a program of this character which you cannot reduce, because, as Mr. Mills suggested, you were not sufficiently mindful of these flexibility characteristics, as described by Professor Froelich, at the time you put the program into effect. In other words, there are statutory provisions which preclude adjusting the rate at which you would spend money in this program. It seems to me that under these circumstances, the stability characteristics and the social-priority characteristics become one single characteristic, looked at from two different angles. Would you agree or disagree? Mr. SCHLESINGER. It seems to me that one man's "waste" is another man's "social justice." Although one can draw some kind of mathematical relationship as you suggest, in the final analysis whether a program should be curtailed cannot be decided on stability grounds alone. It must be decided upon the basis of individual judgment and political judgment about which, I fear, the economist, as an economist, has relatively little to offer. Mr. TURE. I wasn't really suggesting that there are no other characteristics. But what do you really have in mind when someone proposes to the administration or the Congress that a specific water-conservation project be undertaken? What are these other considerations. which are nonquantifiable in dollar terms? They become quite small. The characteristics that are important are the savings that you get in terms of land uses, productivity improvements in farming, and so forth, and these are savings that are quantifiable in dollar terms. Presumably the Department of the Interior and the other agencies that are directly responsible in determining which of these programs they will undertake, try to use a fairly rigorous method of appraising benefits against cost. The point that was made yesterday afternoon was that the rate at which they discount these benefits is, on the whole, much too low, a 3-percent rate. But assume that we could find the rate that was real or more accurate. Professor Harberger suggested 6 percent as an appropriate average. Under those circumstances, it seems to me that there really is virtually nothing else besides the measurable benefits that comes into the determination of whether or not this is a socially desirable or undesirable thing to do. Under those circumstances, if you find that the program that you have enacted was rigid, that it could not be adjusted in response to changes in the circumstances of the economy, you would, in fact, find yourself continuing at a given level with a program, the social priorities of which had fallen way below many other things that you would like to be spending money on. I think that perhaps the real direction of the chairman's suggestion about the use of stabilization characteristics as a criterion for examining public expenditures for the future is that really this is the type of consideration which, where appropriate, ought to be given due weight so that we could avoid the kind of situation that perhaps we got into in the highway program. Professor Brownlee pointed out yesterday that because ballistic missiles now are much more productive, clearly, with a given amount of resources, everything else is less productive. But in terms of the amounts of money which the Federal Government is committed to spending on the highway program, you would not arrive at that conclusion. You would say that it is just as productive as it was in 1956, despite the very vastly changed external circumstances. Representative MILLS. The trouble with preparing legislation is writing in the necessary language that we are talking about as being necessary from the very beginning. That is the problem. Mr. SOMERS. Mr. Chairman, if there are no other questions, may I take the liberty of speaking for the panel to thank you and Congressman Curtis for the privilege of appearing before you. We are greatly heartened by your careful attention even if it should turn out that you don't follow our advice. Representative MILLS. You know, Mr. Curtis and I are always prone to follow advice. We do want to express our appreciation to each and every member of the panel for your part in the compendium, your appearance today, and the very helpful information you have given us as we proceed with a consideration of Federal expenditures and economic stability. Thank you very much, gentlemen. The committee stands adjourned until tomorrow morning at 10 o'clock in this room. (Whereupon, at 4: 45 p. m., the subcommittee recessed, to reconvene at 10 a. m., November 21, 1957.) FEDERAL EXPENDITURE POLICY FOR ECONOMIC GROWTH AND STABILITY THURSDAY, NOVEMBER 21, 1957 CONGRESS OF THE UNITED STATES, The subcommittee met at 10 a. m., pursuant to recess, in the old Supreme Court chamber of the Capitol Building, Representative Wilbur D. Mills (chairman of the subcommittee) presiding. Present: Representative Wilbur D. Mills; Representative Thomas B. Curtis; Representative Richard Bolling. Also present: John W. Lehman, acting executive director, and Norman B. Ture, staff economist. Representative MILLS. The subcommittee will please come to order. This morning in our current study of Federal expenditure policy for economic growth and stability we are going to focus on procedures for determining Federal spending programs. The discussions that we have had so far in these hearings have impressed upon me the great importance of continually improving budget techniques and the budget presentation if those, who must make policy decisions about Federal spending programs, are to do so wisely and objectively. From the viewpoint of the Employment Act objectives involved in Federal spending policy, the necessity for a clear understanding of what specific spending programs will attempt to do and what they will cost is essential if we are to understand their impact on the economy and the demands they will place on the Employment Act machinery for assuring a high level of economic growth and minimum fluctuations in the rate of resource use and the price level. Each panelist will be given 5 minutes in which to summarize his paper. We will proceed in the order in which the papers appear in the compendium, and we will hear from each panelist without interruption. Upon completion of the opening statements, the subcommittee will question the panelists for the balance of the session. I hope that this part of the session can be informal and that all members of the panel will participate, commenting on the papers presented by other panelists and on the subcommittee members' questions. This morning we will hear first from Prof. George F. Break, department of economics, of the University of California in Berkeley. Professor Break. 235 STATEMENT OF GEORGE F. BREAK, PROFESSOR, DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, BERKELEY Mr. BREAK. The hidden effects of Federal credit programs: Federal credit agencies need not spend money in order to accomplish their purpose of increasing the flow of credit to selected groups in the country. Frequently a simple governmental guaranty of private loans will be quite sufficient, and such procedures have become increasingly important in recent years. No measure of their significance, however, is included in either the conventional or the consolidated cash budget, and to this extent these documents give an incomplete picture of the economic effects of the Federal Government. All Federal loan guaranty programs protect the lender to some degree against default on the part of the borrower, and in addition some of them, such as the deferred participation loan program of the Small Business Administration, enable the lender to liquidate part or all of his investment without loss prior to maturity. By these means important stimulus is given to the flow of private credit to home buyers, farmers, shipping companies, small-business men, exporters, and local governmental agencies engaged in urban renewal and development. The magnitude of these Federal activities may be judged from the fact that gross new commitments were almost $16 billion in fiscal 1956, and the net volume of private credit insured that is, after deduction of repayments made under previously insured loans-was $5.7 billion. These figures may be compared with total Federal cash payments of $73 billion in 1956 and a cash surplus of $4.5 billion. The latter figure implies a substantial anti-inflationary effect. Before accepting it at face value, however, one should devote some attention. to the loan-guaranty program. The income-generating effects of these activities cannot, of course, be read directly from published figures on guaranties authorized, funds disbursed, or the net change in insured credit outstanding. In the case of agencies such as the Small Business Administration, the Farmers' Home Administration, and the Export-Import Bank, it is true that the principal effect is undoubtedly to make credit available to people who otherwise could not have obtained it. Some of this additional money, however, may go to refinance existing loans or to purchase land or used assets and hence will not increase private incomes. Secondly, neither authorizations nor disbursements need correspond closely with the timing of the economic impact, and loan principal repayments may not be highly correlated with the deflationary effects of the contractual obligation to repay loans received. In other cases, such as the FHA and VA housing programs, the main effect may well be to make mortgages available on more lenient credit terms to people who could have borrowed in any case. Two questions then arise: (1) By how much have interest rates been lowered, maturities increased, and loan-to-value ratios raised as a result of the Government's insurance and guaranty programs; and (2) What amounnt of stimulus do changes of this sort provide to the demand for housing? Although we can, by comparing conventional and insured mortgages, estimate the minimum impact of the Government programs on mortgage credit terms, we still have no direct quantitative evi |