With each dollar of net lending contributing a dollar to the highly visible unified budget deficit, there is a greater likelihood that firmer limits will be placed on credit programs in an effort to reduce the deficit. Furthermore, by bringing the FFB's lending activities onto the budget and by requiring that these loans be reflected in the deficit, the unified budget will provide a more accurate picture of the extent to which these activities absorb and reallocate the Nation's scarce resources. As important as this step would be, this committee should recognize that many more legislative initiatives will be required to come to grips with the problem of rapid credit growth. There are two reasons for this. First, inclusion in the unified budget is no guarantee that growth in credit programs will be restrained. As long as many of these programs maintain their entitlement status and continue to offer very attractive subsidized rates to program beneficiaries, control problems will persist. In the absence of other forms of restraint, control proposals that rely chiefly on better accountability, honest budgeting, and aggregate targets will not necessarily be effective in controlling program growth for the same reason that the spending entitlements continue to slip past the elaborate and comprehensive controls and accountabilities of the existing congressional budget process. Second, because only a portion of the Federal Government's credit activities are funded by the FFB, control procedures which encompass all credit activities are also needed. For this reason, the chamber continues to endorse legislation that would establish a formal, permanent credit budget that subjects all loans and loan guarantees to the discipline of the budget. With a formal credit budget, Congress would have to set an overall credit target consistent with general macroeconomic policy objectives, trends in the budget deficit and the state of domestic financial markets. Once such an upper limit on total credit support is established, Congress would be required to allocate this fixed total among competing uses. This would necessitate scrutiny of each of the many credit programs. In turn, this evaluation process could lead to program reforms, as well as to the elimination of duplicative programs and those that have outlived their usefulness. ADDITIONAL PROPOSALS OFFERED BY CHAMBER OF COMMERCE In addition to our support of S. 1679 and legislation that would establish a credit budget, the chamber also recommends that Congress consider the development and/or the enactment of the following additional proposals. In order to facilitate an effective evaluation process, our third recommendation is that Congress develop a clear and concise criteria that could be used to reassess each of the existing programs and to better relate the objectives of the program with the type of credit assistance that is offered. In surveying the 350-some odd programs, it is obvious that they represent a 50-year accumulation of overlapping activities without any clear sense of priorities regarding either the level of support, the depth of support or the type of support. Interest rate subsidies, for example, vary widely and appear to have little relationship to current national objectives. Development of a criteria for granting credit support should be able to assist us in answering questions such as, what are the beneficiaries' credit problems-access or ability to pay? Is the existing interest rate subsidy appropriate in light of the changed financial market conditions? Are the programs equitable? Has the original program objective been met? Where an interest rate subsidy was once offered, will a guarantee be sufficient now? Given the vast scope and complexity of the Government's credit market involvement, such criteria will be essential to making informed decisions on the needs for existing and proposed credit programs? Our fourth recommendation is to limit interest rate subsidies on direct loans and on guaranteed loans that are converted into direct loans. Many program interest rates were set by statute in the distant past when market rates were much lower. Programs that once offered modest subsidies now offer deep ones. The failure to change these rates in response to changed market conditions has contributed both to rising program costs and excessive program demand. Finally, we urge that in reviewing the existing programs, Congress consider modification, reduction or elimination of those programs and program objectives that can now be met by private sector sources. Many Federal credit programs have provided important benefits to our economy by either demonstrating the commercial viability of a certain type of loan or enterprise, or by providing credit for important segments of our economy when financial and economic stress immobilized the private financial system. But as times change, the initial justification for establishing the program may no longer exist. In conclusion, the chamber believes that the reforms included in S. 1679, the establishment of a formal credit budget and the three additional proposals discussed in our statement would make an important contribution to limiting the growth in Federal credit programs. We urge this committee to carefully consider these proposals and recommend that Congress enact the appropriate legislation to put them in place. [The complete statement follows:] 26-196 0-83--9 The Chamber's mission is to advance human progress through an economic, incentive, initiative, opportunity and responsibility. The Chamber of Commerce of the United States is the largest federation of business and professional organizations in the world, and is the principal spokesman for the American business community. The U.S. Chamber represents more than 207,000 members, of which more than 203,000 are business firms, more than 2,600 are state and local chambers of commerce, and more than 1,200 are trade and professional associations. More than 85 percent of the Chamber's members are small business firms having fewer than 100 employees. Yet, virtually all of the nation's largest industrial and business concerns are also active members. We are particularly cognizant of the problems of smaller businesses, as well as issues facing the business community at large. 10 Besides representing a cross section of the American business community in terms of number of employees, the U.S. Chamber represents a wide management spectrum by type of business and location. Each major classification of American business manufacturing, retailing, services, construction, wholesaling, and finance numbers more than 15,000 members in the U.S. Chamber. Yet no one group constitutes as much as 23 percent of the total Chamber membership. Further, the Chamber has substantial membership in all 50 states. The Chamber's international reach is substantial as well. It believes that global interdependence provides an opportunity and not a threat. In addition to the 47 American Chambers of Commerce Abroad, an increasing number of Chamber members are engaged in the export and import of both goods and services, and have ongoing investment activities. The Chamber favors strengthened international competitiveness and opposes artificial U.S. and foreign barriers to international business. STATEMENT AMENDMENTS TO FEDERAL FINANCING BANK before the SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE CHAMBER OF COMMERCE OF THE UNITED STATES by Dr. Ronald D. Utt I am Dr. Ronald D. Utt, Deputy Chief Economist for Economic Policy at the Chamber of Commerce of the United States. On behalf of the Chamber's over 207,000 business, trade association and local and state chamber members, I welcome this opportunity to present our views on federal credit programs, their rapid growth in recent years, and the existing and proposed efforts to control them, including S. 1679, a bill that would require that programs financed through the Federal Financing Bank (FFB) be included in the federal budget. The Chamber endorses S. 1679, enactment of which would be an important step toward gaining better control over those portions of the federal credit programs that are ultimately financed by the FFB. However, by itself, inclusion of these programs in the budget is no guarantee that such a control mechanism will be effective or that program growth will be limited. The need for better control is obvious. Since the late 1970s, federal loan and loan guarantee programs have expanded at a rate in excess of the direct federal spending. As a consequence, federal credit program activity has risen to record levels of intrusion in U.S. financial markets, leading to an unprecedented degree of government credit allocation. Combined with the borrowing needed to fund the deficit, total funds raised under federal auspices absorbed nearly 50 percent of all funds raised in credit markets. Given the current state of our financial markets, the expectation of continued large budget deficits and the private sector's need for investment capital, the Committee is to be commended for focusing its attention on this important but often ignored aspect of federal credit market intrusion. |