Substantial increases for health, education, welfare, and other community development programs. Thus, the 1970 budget will maintain the momentum in key social programs, while holding down other parts of the budget. The Federal pay raise due to take effect in July 1969 accounts for $2.8 billion of the overall increase. Interest costs will be up by $0.8 billion, while national defense outlays are estimated to rise by $0.5 billion, reflecting-for the first time in several years—an increase for forces not committed to Southeast Asia support, substantially offset by reductions in outlays for Vietnam. Outlays for all ohter programs will increase, net, by only $0.2 billion. This net rise reflects both increases-totaling about $2.2 billion-and decreases totaling about $2 billion. Major increases are provided for such activities as the highway program, the recently-enacted safe streets program, and a proposed expansion in our airways system contingent on enactment of increased aviation user charges. Among the decreases are a reduction in the postal deficit based on proposal postal rate adjustments, reductions for Commodity Credit Corporation price support operations and P.L. 480 shipments, and a continued decline in outlays for the space program. CHANGING STRUCTURE OF FEDERAL BUDGET OUTLAYS The priorities implicit in the 1970 budget can be sharpened by looking at the trends in outlays over the 6-year period covering the years of the Johnson Administration budgets. Between 1964 and 1970, total outlays will have risen by 65%. However, within that total, major social programs show an increase of 123%, more than doubling since 1964. This is twice the rate of increase for any other category of Government programs. Interest is up 63% in these years. National defense outlays, including special Southeast Asia support, are up 52%. Veterans benefits and services will have risen by 36% between 1964 and 1970. All the other programs of the Government show a growth of about one-eighth in this 6-year period, clearly reflecting, I believe, the policy of holding down on programs of less urgency and reducing outlays to the extent feasible, while giving highest priority to efforts to meet urgent domestic needs. In these efforts, the Federal Government is increasingly relying on State and local governments, through rising amounts of Federal financial aid. Grants to State and local governments, are estimated to total $25 billion in 1970, compared with $20.8 billion in the current fiscal year. Since 1964, grants have doubled in amount and now make up more than one-fifth of total Federal spending for civilian domestic programs. Federal-aid outlays now represent about 18% of State and local revenues, compared with about 15% in 1964. Of particular interest is the fact that within the total of Federal grants, there has been a major shift to urban metropolitan areas, where almost two-thirds of all Americans live. A considerable amount of direct Federal outlays goes into these areas in the form of transfer payments to individuals, such as social security benefits, or through construction projects, such as post offices. However, in addi tion, Federal grant programs have been increasingly focused on urban areas. In 1964, an estimated $5.6 billion, or 55%, of total Federal grants to State and local governments went to metropolitan areas. The 1970 budget provides $16.7 billion for aid to these areas, triple the amount in 1964, and representing about 67% of total Federal grants estimated for 1970. Looking to the future, the President is recommending establishment of an Urban Development Bank to provide substantial amounts of long-term financing of public facilities in urban communities through the combined efforts of Federal, State, and local governments and private enterprise. This Bank would raise funds primarily by issuing federally guaranteed bonds to the public and, in addition to financial aid, would provide technical assistance to the Nation's urban areas. In conclusion, I believe that the 1970 budget represents an appropriate response to the fiscal policy requirements for maintaining a healthy and vigorous economy and provides for continuing the progress we have made in meeting both the Nation's military needs and high priority domestic objectives. Chairman PATMAN. Thank you very much, sir. Without objection, we will continue the traditional policy that this committee has had a long time of recognizing each member for 10 minutes to question our witnesses until each member present has had an opportunity to interrogate the witnesses. Now, I will ask you gentlemen three questions here and I will ask you to answer them when you go over your transcript of the record of this proceeding. If that is satisfactory, we will save a little time that way. We have very disturbing distortions in our economy. The excessive level of interest rates, the highest in our history, is threatening the housing industry and the small businessman. It is always the weakest who are hurt by tight money. Do you not believe, as a responsible public official, that we have to do something about it and do it quickly? (The following reply was submitted by the Council of Economic Advisers :) COUNCIL OF ECONOMIC ADVISERS RESPONSE TO CHAIRMAN PATMAN I would certainly agree that high interest rates and tight money create disturbing economic distortions. As you suggest, these bear down inequitably on particular groups in our economy such as homebuilders and home buyers. The only appropriate remedy and preventive strategy for countering these trends is greater reliance on fiscal policy for economic restraint. Relieving the pressure on financial markets was a key objective of the administration's tax proposals in 1967 and early 1968, and it is an important reason for extending the surcharge this year. If fiscal policy does not provide the needed restraint, tight money may become the only alternative to an inflationary boom which would be even more dangerous and more inequitable. Under present circumstances, it would be unrealistic to expect a rapid reversal and decline of interest rates. It will take clear and distinct evidence of an economic slowdown to convince both borrowers and lenders that financial conditions will relax and to alter inflationary expectations which tend to raise interest rates. A bipartisan consensus in the Congress on supporting extension of the surcharge would have favorable effects on financial markets. With the stabilization program that we are proposing, the Federal Reserve should be able to reduce the restraint from monetary policy gradually within 1969. (The following reply was submitted by the Treasury :) TREASURY DEPARTMENT RESPONSE TO CHAIRMAN PATMAN Interest rates are extremely high by historical standards. In key areas, they stand well above the peaks reached at the time of the "credit crunch" in 1966. However, while credit is expensive, it is much more generally available than during the 1966 period of stringency. It is hoped that a satisfactory degree of credit availability can be maintained and that there will be no repetition of the 1966 experience when home financing and construction, as well as other areas of the economy, experienced a heavy burden of adjustment. The shift to fiscal restraint embodied in the Revenue and Expenditure Control Act of 1968 had as one of its important objectives the maintenance of adequate flows of credit and the avoidance of undue reliance upon monetary tightening. For the present, a degree of monetary and fiscal restraint is required in order to achieve a necessary moderation of inflationary pressure. But, the fiscal measures now in place should gradually ease the existing pressures on credit markets and allow monetary policy a needed degree of flexibility. The improved Federal financial position resulting from the surcharge and expenditure control will be an important factor easing the strains on private credit markets. On the unified budget basis, there was a net Federal credit demand-borrowing from the public-of $23.1 billion in fiscal year 1968. In fiscal 1969, there is to be a repayment of $3.1 billion, and in fiscal 1970 a repayment of $4.0 billion. The Federal Government has shifted from being a net demander of funds from private credit markets and has become a net supplier of funds. In terms of immediate pressures on the markets, it is particularly signficant that between mid-March and June 30 of this year the total public debt will be reduced about $8 billion. Since the trust funds will be acquiring some debt, the paydown to private markets during this period will exceed $8 billion by a considerable margin. In addition to its very important effect on the Federal finances, fiscal restraint is expected to exert a substantial impact on the economy in early 1969. A further moderate slowing in the overall pace of expansion should lead to some scaling down of private credit demands. This would further reduce the degree of pressure being placed on private credit markets. (The following reply was submitted by the Bureau of the Budget:) RESPONSE FROM BUDGET DIRECTOR ZWICK TO MR. PATMAN'S QUESTION CONCERNING INTEREST RATES During the period of debate about the income tax surcharge, the Administration repeatedly called attention to the unfair burdens which rising interest rates create for small businessmen, farmers, the housing industry, and State and local governments, which depend heavily on the money markets for financing. A major reason for requesting the surcharge was to reduce these burdens. And it is a major reason for proposing, in the 1970 budget, that fiscal restraint be continued through fiscal year 1970. In the absence of a policy of fiscal restraint, monetary policy would have to carry an undue share of the load of restraining the economy. We learned well in 1966 the consequences of relying too heavily on monetary policy-exceedingly tight credit, soaring interest rates, and inequitable restrictions on those sectors of the economy noted above. With fiscal restraint continuing through fiscal year 1970, a less restrictive monetary policy than is now necessary should be possible, and the high interest rates we are now experiencing should recede as the supply of funds becomes more pientiful relative to the demand for them. A year ago, the Federal Government was a heavy borrower in the money markets and, thereby, a direct contributor to the upward push on interest rates. This year, and in the year ahead, the Government will be essentially neutral, since outlays in both years will be financed entirely from current revenues. I would like each of you to comment on that as suggested. Now, the Urban Development Bank mentioned by the Director of the Budget, I think, is a very interesting proposal and I am very much. impressed with it. That will give us an opportunity in considering that proposal to consider whether or not we should have tax-exempt bonds or whether or not the Federal Government should pay the portion that the local communities would benefit from by tax-exempt bonds and get rid of them so it will help our entire economy and raise the amount of taxes very much and help the cause of tax reduction— if it is handled just exactly right and it could result in a much lower scale, lower interest rates for housing loans. (The following material was subsequently submitted by the Treasury Department in response to Chairman Patman's suggestion :) The enclosed copy of the draft Urban Development Bank Act of 1969 and the letter transmitting the proposed bill to the Speaker of the House are provided in further response to the question raised by Chairman Patman. Enclosed also are excerpts from three addresses by Under Secretary Deming and an address by Assistant Secretary Surrey bearing on the Urban Development Bank proposal. As stated in the letter transmitting the Urban Development Bank proposal to the Congress, the funds appropriated for payments to the Bank to reduce the Bank's lending rate would not involve a net cost to the Federal budget. Added tax revenues stemming from the fact that the Bank would issue taxable securities would offset the cost of the payments made to the Bank. Also, as stated in the transmittal letter, the tax exempt market would continue to be available to State and local governments as a source of financing after the Urban Development Bank is established. Indeed, by tapping a broader segment of the capital market for loan funds to finance the public facilities needs of State and local governments, the Bank, by its operations, will reduce the growing pressure on the tax exempt market, and therefore indirectly help those governmental bodies which continue to utilize tax exempt securities to finance their capital needs. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, HON. JOHN W. MCCORMACK, Speaker of the House of Representatives, Washington, D.C. January 17, 1969. DEAR MR. SPEAKER: Enclosed are five copies of a proposed bill "To establish an 'Urban Development Bank' to assist in broadening the sources and decreasing the cost of capital funds for State and local governments." Also enclosed are five copies of a section-by-section summary of the bill. This proposed legislation would implement recommendations made by the President in the State of the Union and Budget messages. Enactment of the legislation will help the Nation, through a partnership of Federal, State and local governments, working with private enterprise, to move forward to meet the massive needs of our cities and their people. It is now clear that we are undergoing a tremendous expansion in borrowing by State and local governments for capital expenditures. It is estimated that in the next ten years State and local governments may need to borrow over $200 billion to finance essential public facilities the communities of the Nation must have to provide a suitable living environment for their citizens. A consensus of concern has arisen over the capacity of the capital markets, as now structured, to cope with the essential credit needs of State and local governments. Even at present levels of borrowing, the municipal bond market is strained from time to time and is not efficient and effective: interest rates are inordinately high on State and municipal obligations; maturities are unrealistically short for many development projects; the range of investors is narrow, primarily commercial banks, and the market is particularly inadequate in times of credit stringency; the rating system denies many communities the financing they need for essential facilities on reasonable terms; and smaller communities whose issues are in small amounts or are not familiar to investors find no market. These defects in the existing market can be expected to be magnified by many times in future years as State and municipal government credit needs increase and indeed may render the adequate financing of State and local public facilities impossible. We believe it should be a prime national concern to assure the continued availability of private financing for State and local capital needs. This proposed legislation is designed to expand the capital market available to States and localities by providing an additional financial mechanism which will help them to secure, on resonable terms, the financing they need to enable them to construct essential public facilities. It would establish a federally chartered bank-an Urban Development Bank-to finance the capital cost of State and local government public works and community facilities. The activities of the Bank would be directed by a 17-member Board of Directors, the Chairman of which would be the president of the Bank. This official would be appointed by the President of the United States by and with the advice and consent of the Senate. The other 16 members of the Board of Directors would consist of not more than three Federal officials or employees appointed by the President of the United States; three representatives of local or State governments appointed by the President of the United States; and ten directors elected by three distinct groups of stockholders in the bank. Of these ten elected directors, four would be elected by State stockholders, four by local governments, and two by private corporations and individuals who subscribe to stock in the Bank. An initial Board of Directors, to serve at least one year, would be appointed by the President of the United States, by and with the advice and consent of the Senate. Members of this initial Board of Directors would represent Federal, State, local and private interests The Bank would secure funds necessary to finance its lending activities by selling its obligations in the private capital markets. To help protect holders of the Bank's obligations against possible losses of principal and interest and to assure the Bank adequate access to the capital market at reasonable interest rates, the Bank would also be authorized to borrow from the Treasury. This is the highly successful approach initially used to insure investor confidence in the Federal National Mortgage Association. Interest on obligations sold by the Bank to finance its lending activities would be fully taxable. To enable the Bank to lend to State and local governmental bodies at favorable interest rates, however Federal payments would be made to the Bank to cover the difference between the Bank's borrowing cost and the amount of interest it receives on its loans. The amount of those payments and the volume of Bank lending would be controlled by the Congress. The funds appropriated for payments to the Bank to reduce the Bank's lending rate, however, would not involve a net cost to the Federal budget. Added tax revenues stemming from the fact that the Bank would issue taxable securities would offset the cost of the payments made to the Bank. The tax exemept market would continue to be available to State and local governments as a source of financing after the Urban Development Bank is established. Indeed, by tapping a broader segment of the capital market for loan funds to finance the public facilities needs of State and local governments, the Bank, by its operations, will reduce the growing pressure on the tax exempt market, and therefore indirectly help those governmental bodies which continue to utilize tax exempt securities to finance their capital needs. The Bank would serve as an instrument to advance the welfare of our Nation's citizens while permitting each State and local government to pursue its developmental policies in the manner it deems best suited to the needs of its citizens. We believe this proposal exemplifies creative federalism at its best. The mechanism it creates to meet a national problem enlists the financial support and participation of all levels of government-Federal, State and local-as well as the private sector in a joint enterpries to enable communities to provide needed public facilities. In summary, we believe creation of the Bank will further three broad purposes First, and foremost, it will make possible a greater allocation of capital to the development of needed public facilities. Second, it will help to stimulate the construction of public facilities which will contribute to economy, efficiency and the comprehensively planned development of the area in which the facility is to be located. Finally, it should help prevent disruption of the capital markets likely to result from the efforts of State and local governments to borrow funds to finance the large increase in public facilities expenditures which will take place in the next decade. The financial problems of our State and local communities are both urgent and growing. The early establishment of an Urban Development Bank is both feasible and desirable. We recommend early action by the Congress. The Bureau of the Budget advised on January 16, 1969 that there is no objec tion to the submission of this draft legislation to the Congress and that its enactment would be in accord with the program of the President. Sincerely yours, JOSEPH W. BARR, Secretary of the Treasury. ROBERT C. WOOD, Secretary of Housing and Urban Development. |