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Since private business capital formation depends heavily on the cost and availability of credit, public policies that raise costs, limit supply and misallocate scarce resources will diminish the amount of private capital formation that is undertaken. These credit programs, by pre-empting a significant portion of the credit pool, reduce the amount of funds available to the private business sector as well as to the consumer who must compete with the government for credit to purchase a home or an automobile.
Further, the interest rate subsidies that usually come with these federal loans contribute to an inefficient allocation of credit within our economy. At a time when high interest rates have forced businesses to limit their investment and to direct their funds only to those projects that offer the promise of very high yields, federally-assisted borrowers, paying subsidized interest rates, are able to invest in projects whose return may be only a third or a fourth of that required by private business. As a consequence, the productivity of our capital stock is lowered and economic growth and output suffer accordingly.
In addition to their adverse impact upon the nation's efficient use of its scarce capital resources, the operation of these lending programs has often been wholly out of phase with major macroeconomic policy initiatives. During 1980, efforts to reduce the rate of inflation were the primary focus of government policies, and heavy reliance was placed upon the Federal Reserve to meet that objective by slowing the growth of overall credit extensions. As the record clearly shows, the Fed was successful in achieving that objective. The amount of total credit advanced in the U.S. economy actually fell by 14.1 percent in FY 1980 and 4.3 percent in FY 1982.
But while the private sector was forced to make do with less, the federal lending programs and the recipients of their many loans and loan guarantees not only remained unscathed but managed to increase their share of the credit pie. In fact, the net volume of credit advanced under federal auspices actually increased over the period. Thus, while one segment of government was taking harsh measures to reduce inflation, the actions of other government agencies offset these efforts. As a result, the unassisted sector bore a disproportionate burden of monetary restraint. In 1980, when a 20 percent prime rate and 16 percent consumer loan rate contributed to the failure of approximately 1,600 automobile dealerships, the Rural
Electrification Administration began a new program to provide 35 year loans at a 5 percent interest rate to finance rural cable television systems.
Past Efforts to Control Federal Credit
In recent years, there has evolved in public policy circles an increased awareness of the problems created by the rapid growth in these programs. This recognition of the problem has led to the development of a number of proposals designed to exert some sort of control over federal lending. President Carter's 1980 budget expressed concern over this growth and announced the implementation of a control system based on annual limitations on gross lending activities. In his 1981 budget, a credit budget was introduced and loan and loan guarantee targets were set for the next fiscal year. In order to offset the excessive growth in the past, President's budget for that year proposed that direct loan obligations should increase by only 1.7 percent and that growth in loan guarantee commitments should be held to 8.3 percent. But by the time his 1982 budget was published, it was apparent that the new control system was slipping badly and that 1981 federal credit growth would increase significantly. During that year, outstanding direct loans grew by 21 percent while outstanding guaranteed loans increased by 15 percent.
The failure to stem the growth in federal credit is not especially surprising inasmuch as the Carter budget proposed to subject only a portion of the credit programs to appropriation bill limitations. Of the $60.7 billion in new direct loan obligations, only half ($27.2 billion) were to be subject to appropriations bills. Of the expected $81.4 billion in proposed loan guarantees, limits were set on only $32.5 billion, or three-fifths of the total.
In discussing these proposed limits, the FY 1981 budget noted a key obstacle to controlling the credit programs (and spending programs as well) that is as true today as it was then.
"At this stage in the development of the credit control system, the administration is proposing that certain credit programs be subject only to the control provided by authorizing legislation. Appropriation bill limitations have not been proposed for these programs, which include insurance programs...and entitlement programs, under which qualified
recipients have a legal right to direct loans or loan
guarantees. These are analogous to relatively uncontrollable
The fact that many of the credit programs are of an entitlement nature is one of the chief reasons why we believe that proposals such as S. 1679 represent only a partial solution to the problem of rapid federal loan and loan guarantee growth. As long as certain individuals are entitled by law to receive loans and loan guarantees, 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 reasons that the spending entitlements continue to slip past the elaborate and comprehensive controls and accountabilities that comprise the existing budget
Recognizing that the unusual budgetary status of many of these programs was partly to blame for their apparent uncontrollability, a number of proposals have been introduced during the past few years to establish a formal mechanism to better control federal credit programs. Reps. Mineta and Bethune and Senator Percy introduced legislation that would have the effect of formally including all federal credit activities, regardless of current budget status, in the congressional budget process. Under their proposals, Congress would create a credit budget that would establish formal limits on total federal lending support for each fiscal year. In effect, Congress would follow the same budget process for loans and guarantees as is currently mandated for revenues and spending. With the total established at the outset, Congress would have to allocate this fixed amount among competing federal programs according to a clearer sense of national priorities. The Chamber endorsed these two bills and recommended their enactment.
Although neither of the bills were enacted, Congress has, through the budget resolutions for FY 1983 and FY 1984, established a formal, binding credit budget for the fiscal year under consideration and subjected the credit programs to the existing budget process. In effect, Congress would, on a year-to-year basis, follow the same budget process for lending as is currently mandated for revenues and spending.
This process of temporary, one year credit budget authority offers some insights into how a permanent credit budget might work. The first observation
is that Congress initially passed up an opportunity to establish ceilings that would actually restrain credit activity. Initially, ceilings were set at levels equivalent to a current services estimate of what credit support would have been in the absence of any overall restraint mechanism. In FY 1982, when ceilings were not binding, credit limits were set well above actual loan activity. In establishing the binding FY 1983 ceilings, Congress left the ceilings essentially unchanged for direct loans and secondary loan guarantees, and raised the ceiling for primary loan guarantees by 36 percent. Since actual FY 1982 activity fell well below that year's ceilings, the FY 1983 ceilings would have allowed for a substantial expansion in actual credit activity.
For FY 1984, the First Budget Resolution held the line on all guarantees and reduced the ceiling on direct loan obligations. If these ceilings hold, and if the process of restraint continues, over time the federal credit programs should decline as a share of total credit advanced in the U.S. economy.
The second observation, which has relevance to the legislation before this committee, is that the credit budget has yet to attract a great deal of public and congressional attention. Unlike the federal budget, which is the subject of intense debate, scrutiny and wide attention, the credit budget often becomes a mere footnote to the larger issue of federal budgeting and resource allocation between the private and public sectors. Without such scrutiny, and without the ever present threat that program expansion will add to the highly visible budget deficit, expensive credit programs of limited value will continue to exist and grow.
S. 1679 will alter this by effectively bringing many of these programs on to the budget and into the mainstream of the budget debate. No longer will these programs be cloaked in obscurity. With each dollar of net lending contributing a dollar to the reported deficit, there is a greater likelihood that firmer limits will be placed on credit programs in an effort to reduce the deficit.
Chamber Recommendations to Control Federal Credit
While the one-year credit budget authority combined with past and present efforts by this Administration may have had some success in limiting
the growth of federal credit programs, it is imperative that a permanent, comprehensive and highly visible set of processes and procedures be adopted to ensure that these programs come under scrutiny every year and that firm limits, consistent with an efficient allocation of credit between the private and the public sectors and long-run growth objectives, are set on federal credit activities.
As trends over the past several years demonstrate, informal targets and good intentions have not been very effective in restraining these programs in the face of substantial demand for subsidized loans and loan guarantees. A more formal and binding process is required if we are to restore a better balance between private and public credit needs.
It is for this reason that the U.S. Chamber endorses the proposed changes to the Federal Financing Bank Act of 1973 that are contained in S. 1679. By bringing the FFB's lending on to the budget and requiring that these loans be reflected in the deficit, S. 1679 will provide a more accurate picture of the extent to which these activities absorb and reallocate the nation's resources. Moreover, by moving these activities from their off-budget status on to the budget, future efforts to limit their growth are likely to be more successful.
As important as this step would be, many more legislative initiatives will be needed if we are to come to grips with the problem of rapid federal credit growth. 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 process. With a formal credit budget, Congress would have to set an overall credit target consistent with general macroeconomic objectives, trends in the budget deficit and the state of the domestic financial markets. This process could also be used to lower gradually federal credit intrusion in domestic credit markets to the 14 percent it averaged during the decade of the 1970s.
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 loan support programs.