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The Chamber's mission is to advance human progress through an economic,
political and social system based on individual freedom,

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.

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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.

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The Chamber's international reach is substantial as well. 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.



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for the



Dr. Ronald D. Utt
September 19, 1983

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.

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Typically, concern for the extent to which the federal government "crowds out" private borrowers has been expressed solely in terms of the size of the budget deficit. The deficit does, of course, interfere with financial markets, but it is only one aspect of federal credit pre-emption, because it does not reflect the activities of the loan and loan guarantee programs of federal agencies and federally-sponsored enterprises. Indeed, in fiscal years 1980 and 1981, these programs pre-empted an even greater share of domestic credit resources than did the budget deficit.

Scope of the Federal Credit Control Problem

Defined as direct loans and loans guaranteed by federal agencies and federally-sponsored entities, these lending programs have exhibited all of the growth and control problems usually attributed to federal spending. In recent years, these loans and loan guarantees have grown at a much faster rate than have the more widely considered measure of budget outlays. From 1976 through 1983, budget outlays rose 122 percent, compared to 387 percent for net federal loans and loan guarantees and federally-sponsored credit advances.

Compared to the attention devoted to the deficit, the relative neglect of this lending activity is rather surprising inasmuch as these programs have essentially the same effect on our economy and its financial markets as does the more visible deficit. Both lay claim to scarce domestic resources and reallocate them to a vast array of beneficiaries. Moreover, these programs are not negligible in size. During FY 1982, the federal government and its sponsored enterprises made $182.8 billion in loans to various private and quasi-private entities, and guaranteed another $85.8 billion in loans, for a total of $267.6 billion in federal credit market intervention. After netting out repayments and double counting, net new lending and guarantee support reached $87.5 billion in FY 1982.

As a result of the recent rapid growth in these programs, federal lending activities in the first three years of this decade accounted for more than 20 percent of total funds advanced in U.S. credit markets, up from 17.1 percent in FY 1979 and 11.9 percent in FY 1977. When the borrowing needed to fund the deficit is added to this, total government credit demands amounted to 48.9 percent of all funds raised in U.S. credit markets during FY 1982.

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In large part, the size of the lending activity and the rapid growth of the programs are attributable to the special attractiveness of these programs to the eligible borrowers and to the government officials who create, enact and administer them. The borrowers like the programs because they offer loans at interest rates that are often substantially below market rates, with rates of 2 percent, 5 percent or 7 percent not uncommon. The Office of Management and Budget estimates that the present value of the interest rate subsidies available on federal loans made during FY 1982 amounted to between $10.8 and $14.0 billion, depending upon market interest rate assumptions. In FY 1980, when market interest rates were higher, the value of the subsidy was estimated at $18.8 billion.

Public officials like the programs because they offer a way of assisting constituent groups without adding to budget outlays and the reported deficit. Moreover, the funding of these programs does not necessarily require any increase in tax revenues. Of the $87 billion of net new loan support provided in FY 1982, only $9.1 billion appeared on the budget. The remainder stayed off budget, either through a variety of creative accounting techniques or because the program's authorizing legislation specifically stated that the program will not be included in the budget. The FFB, a major source of funding for many of the loan programs, is off budget by statute. By the end of this fiscal year, the FFB's holdings of agency debt and loans is expected to total $140.9 billion.

The practice of giving these loan programs an off budget status has contributed to their rapid growth by removing them from the close scrutiny of the budget process and from the view of a public that is deeply concerned about the deficit as reported by present federal accounting procedures.

The growth of these programs and the apparent lack of an effective mechanism to control them as well as an apparent absence of collective congressional will to limit their growth is particularly alarming in light of this country's widely-acknowledged capital formation problem and the effect this has had on our productivity, standard of living and international competitiveness. Given this concern for investment, it is unfortunate that the continued neglect of these lending programs has allowed them to grow to the point where they pose a threat to capital formation.

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