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for defaults or delinquencies. All such payments would be made from appropriated funds. The subsidized credit programs would remain under the policy control of the agencies providing the funds. In many respects, fund charges to agencies for the subsidy elements of credit transactions could be regarded as analogous to rental charges that government agencies must pay to the General Services Administration for the use of office space. For optimum budget-process control, subsidies to the fund should be made available in the form of capital grants representing the present value of the subsidy, rather than through annual appropriations."

The fund would still have to calculate what the amounts of such subsidy payments should be, but the estimate would not be purely hypothetical; rather, it would be based on a calculation of the added money the fund needed to operate without a deficit. Under this approach, all subsidy elements of federal credit programs would be subject to the appropriations process and would automatically be included in the unified budget as direct payments to the fund (which would itself be off-budget). They would thus be placed in clear and direct competition with other budget outlays.

As a possible long-run solution to the problem of making subsidized portions of federal loan programs directly comparable with regular budget expenditures, we recommend careful further exploration of the proposal to put all federal credit and guarantee activities in a national lending fund that would not be allowed to subsidize transactions or take risks on its own account but would receive reimbursements from government agencies equivalent to the cost of providing subsidized loans or guarantees on behalf of these agencies. Careful study of this proposal should be high on the agenda of the proposed Budget Concepts Commission.


In summary, we favor a phased approach toward improving the treatment of federal credit activities under the budget process. The first step should be to strengthen the so-called credit budget and bring it more fully into line with the types of budget procedures used in connection with regular spending programs. This step is designed to permit improved budget-process control over the impact of federal credit programs on financial flows and markets. A second (or perhaps parallel) approach should gradually increase the comparability of credit and noncredit programs and allow more direct trade-offs between the two.

8. The case for providing subsidies in the form of capital grants should be further examined by the proposed Budget Concepts Commission. The commission should also study how risk premiums and losses should be handled under this scheme.

For the long run, we favor exploration of more far-reaching institutional changes, such as the creation of a loan fund through which credit activity can be fully integrated with the resource allocation procedures of the unified budget.

As an ultimate goal, we envision a two-tier approach. Primary control over credit activities and their impact on incomes and resource allocation would be through direct trade-offs between subsidy elements of credit activities and other elements of the unified budget. At the same time, we favor continuation of a secondary control mechanism to limit the impact of total federal lending and guarantee activities on private credit markets.


Senator TRIBLE. One of the witnesses earlier stated that longterm loans do not belong in the unified budget, but instead in a separate capital budget. CED, I am told, just finished an in-depth study of these questions. How would you answer that suggestion? Mr. STAATS. I can give you a short answer or a long answer. Maybe I can answer your question this way: We did consider very carefully the proposals made for a separate capital budget taken out of the unified budget. This is a very old proposal. It goes back, from my own personal knowledge, to the 1940's. We rejected that idea. We believe that capital spending ought to be subject to the same discipline that all of the rest of the budget is involved in.

However, having said that, we came to the conclusion that much more needs to be done by way of what we would call "capital budgeting" or "capital budget analysis." That is to say, we think that the budget should give higher visibility to the capital items that are in the budget. There is now an appendix to the budget, schedule D, which attempts to cover this. Part of the difficulty is to define precisely what is a "capital" or "noncapital" item.

But what may be more important is the difficulty that this schedule is added up after the budget is submitted to the Congress. It is not a capital budget analysis in terms of looking at where the country's infrastructure needs may be both in the budget year and in a longer term framework. We think having this is terribly important because we do not have a rational basis for making judgments today on the total needs of the country, the total budget requirements for capital outlays. We can look at the Corps of Engineers, the Bureau of Reclamation, the highway program, agriculture-all of these are looked at separately, and are not looked at in terms of what is required by way of long-term investment.

So we find ourselves in a situation where, all of a sudden, we feel we are in a crisis on the highway program and we have to put through a special program. But there are many other parts of the public infrastructure that need the same kind of long-term look.

We think that this kind of longer term framework, if it were undertaken-it doesn't mean necessarily more total dollars; it does mean, though, that as you incrementally finance these programs

year to year, you will have a much better basis for rational decisions on the balance, on a national basis.

We think, also, there needs to be better guidance as to the costbenefit analyses of these capital items that go into the budget.

Having said all of that, people who disagree with us on this say, "All right. Well and good. But it still means we won't get enough investment in capital items because it would be frozen out in competition." That doesn't, frankly, concern me. I don't think it concerns the CED. I think the point is, it is given visibility. If it is looked at in a longer term framework, then we would gamble that the Congress would make the right decisions, keeping it within the framework of the unified budget.

Senator TRIBLE. That's very helpful. I thank you for that answer. Let me ask you another question. Several times in your testimony, discussing the reach of this legislation, you talked about offbudget credit activities that have the character of the direct loans. Credit programs that have "the character of," or quote "are comparable to direct loans.

Do you think these descriptions should apply to Federal loan guarantees that are exclusively financed in the private sector?

Mr. STAATS. With your permission, Frank Schiff will be glad to respond to that question.

Senator TRIBLE. Good. Let me ask one further question. Are they so similar to direct loans that they should be made into direct loans, and included on the budget?

Mr. SCHIFF. The major problem, currently, is that there are various transactions, as you know, that the Federal Financing Bank essentially converts from guarantees into off-budget loans. They become direct loans because it is the Federal Financing Bank that provides the funds. We are thinking of these activities as being activities that ought to be on-budget.

Senator TRIBLE. Rather than reaching out and bringing into the bank those credit activities that now are in the private sector?

Mr. SCHIFF. If they are fully private activities, of course, we wouldn't bring them into the budget. There are, however, various credit initiatives that are privately owned, but in the sense still have some connection with the Federal Government.

Senator TRIBLE. There are substantial Federal activities that have a private character.

Mr. SCHIFF. I think this is where we-where it's very difficult to know exactly where to draw the line.

Senator TRIBLE. I am giving you the opportunity to flesh out that observation.

Mr. SCHIFF. I noticed that this morning's testimony by the Office of Management and Budget made some suggestions in that regard. There are questions, for example, whether you want certain transactions in the budget-Mr. Staats referred to VA loans—which involve a lot of small retail transactions, where there is a substantial financing in the private sector-as one case where perhaps one doesn't necessarily want to put that into the budget in the same way as others, although it still ought to be considered in the credit budget. But there remain questions about the criteria for what should be included in the budget that, I think, are important to consider.

Some of your witnesses say, well, we could finance ourselves just as easily in the private market. And therefore, there is no reason to have any kind of Federal constraints.

I think one of the problems with that is that all of the agencies that utilize the market do affect the overall credit market. They affect the Treasury's ability to finance itself in the market. So you have another issue involved here, which has to do with the original purpose of the Federal Financing Bank and that is to get some regularity into Federal financing operations. I know there is some difference between what should be in the unified budget and what should be under control for credit purposes. That, I guess, is the reason for the so-called credit budget.

But I think it is important to know if these activities really are financed in the securities market, have a substantial impact, and might even be competing with other kinds of Federal financing, including direct Treasury financing. That, itself, can have an effect on Federal budget outlays in the end, because of the cost of borrowing through the Treasury.

So there is a consideration for not leaving out too many of these operations simply on the grounds that they go into private markets.

Mr. STAATS. Mr. Chairman, I listened with a great deal of interest to the presentation of the TVA. While I was Director of the Budget under President Eisenhower, I had responsibility for negotiating that legislation through the Congress.

Senator TRIBLE. Where were you when I needed you? You should have come up to the table. We would have made you a part of that discussion.


Mr. STAATS. What I wanted to say is I think it illustrates a point that Mr. Schiff just made here, and I think he said it quite correctly: If you go through the FFB and convert these guarantees into direct loans, they certainly ought to be part of the unified budget. The part of the discussion which I thought might have been emphasized a little bit more is, even if the TVA goes directly into the market, it ought to be subject to an overall credit budget because the function of the restrictions on credit activities is to limit the impact on the economy. It seems to me that that is quite appropriate and quite consistent with what was written into the 1959 legislation. The function of that provision in 1959 law was to say that the TVA, if it wanted to be independent, could go directly into the market, but you could not go directly into the market without notifying the Treasury.

The Treasury would then have the option of making loans directly to TVA so as to avoid the disruption in the financial markets. But you were quite correct in stating that nothing in this bill was to prevent that from happening.

But historically, the TVA has found the interest rates lower in many instances by going through the FFB or going directly to the Treasury. And they tried to go to the source that provided the lowest costs. But if they go through the FFB, and their transactions

are converted into direct loans, they certainly ought to be subject to the limitations.

Senator TRIBLE. Let me go back and follow up on our discussion with one more specific question, just to kind of get a better sense of your own view. Would a 100-percent Federal loan guarantee, in your judgment, have the "character" of direct loans that you talked about in your testimony?

Mr. STAATS. From the standpoint of its impact on the credit markets, it doesn't appear any different. Frank may want to add to that. He may want to differ.

But from my standpoint, the function of the credit budget is to look at the total credit operations of the Government in relationship to the credit in the private sector.

Senator TRIBLE. In macroeconomics, it surely may have the same impact; but it would have a different impact on the spending and borrowing requirements of the Federal Government.

Mr. STAATS. And you need to keep those two separate in your thinking. With respect to the one, you're talking about Federal credit limitation. The other, you're talking about outlays, and the outlays, of course, depends upon the direct loans.

Mr. SCHIFF. I might mention that as an ultimate solution, as Mr. Staats indicated in his testimony, we do make a distinction between total effects on the credit markets and effects on resource allocations. To measure total effects you use the credit budget that includes guarantees in full. Even with that budget, you still have to assess what the limits on the credit budget should be and what effect it will have on the market. It doesn't automatically mean that the credit budget total represents direct displacement of private credit. If you have all-there are all kinds of loans. For example, you have FHA loans. It doesn't mean that if someone doesn't get that loan then no loan would be made. Very likely some of the borrowers who would use an FHA loan would get the conventional loan.

So the question of how to decide at what level to set the credit budget is somewhat separate from the question of saying exactly what is the total impact. You have to set that level in relation to what you think the total impact would be. Then there is an additional question, and that has to do, really, with how do you compare the resource use of direct spending and credit activities. That's why we say ultimately you need to go to a somewhat different system than the one we have now, to get a direct tradeoff that makes the best sense.

What we are saying is that the real comparison ought to be made between direct spending and the subsidy elements of loans or guarantees. If you adopted this proposal that we think is worth considering, the national lending fund, what would happen is that different agencies would essentially contribute the amount of the subsidy element to that fund-that is the discounted present value of the subsidy plus administrative costs and charges for risk. They would get direct appropriation under the budget for the amounts they contributed.

The budget could then compare those appropriations with direct spending for tanks, school programs, and so forth. That's our ultimate solution.

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