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Notes f o r Ways and Means Markup Session on Debt Limit Bill, October 24, 1973 (originally scheduled to be closed, but committee voted to open to public) Introduction The debt limit was last reviewed by Congress in June of this y e a r . At that time, the Congress set a temporary debt ceiling of $465 until November 30, 1973, and retained a permanent debt limit of $400 billion. Under existing law, the debt limit will revert to $400 on D e c e m b e r 1. Secretary Shultz recently testified b e f o r e this Committee that the public debt subject to the ceiling stood at $462.4 at the end of September, He further testified that the debt ceiling will need to be raised b e f o r e the final week of November if severe p r e s s u r e on the T r e a s u r y ' s cash balance in late November is to be avoided. The facts presented to this Committee by Secretary Shultz are, « I believe, incontrovertible. His recommendation to this Committee that the temporary debt ceiling be raised to $480 f o r f i s c a l 1974 is prudent, expenses an urgent need. I fully support it, and I a m entirely confident that your Committee , whether or not it accepts every detail of the S e c r e t a r y ' s recommendation, will act in sufficient time to prevent financial'embarrassment to the Treasury. As a practical matter, there is little else that this Committee can do. -2II I take it that a m a j o r purpose of these Hearings, as in the past, is not only to review the debt ceiling, but also - - and m o r e fundamentally - to appraise the condition of our Federal finances. Everyone of you, I am sure, is deeply concerned about our nation*s f i s c a l position. Every m e m b e r of this Committee, knows that our economy is in trouble, that the r i s e of the price level which commenced in 1964 has lately a c c e l e r a t e d . That we are now in the midst of the m o s t serious inflation since the Korean War and that, while the inflation that is plaguing our economy has many and complex causes, our Federal f i s c a l policies have contributed to the inflationary pressures which are causing economic hardships far many millions of our people. III. Let m e review s o m e salient facts of recent Fed history (a) In 1954, 1964 Fed. exp. 1966 1974 $71 billion 119 M 135 270 " M ) ) ) ) + 4g +151 (b) These gigantic i n c r e a s e s in Federal spending have [At the end of f i s c a l 1963: 1973: p u b l i c debt : M " $311 459 (c) Since 1961, the unified federal budget has reported a deficit in every years except 1969. -3- (d) In three of the past six f i s c a l y e a r s , the deficit has approximated or actually reached $25 billion. (e) During the last f i s c a l year - - a year of rapidly advancing prosperity - - the deficit exceeded $14 billion. (f) Nor is this all. Since 1969, the borrowing by federal agencies has been excluded f r o m the unified budget. The borrowing by these agencies has been growing rapidly. If we take total of Treasury and agency borrowing: F i s c a l 1970 - $15 billion; 1971 - $24 billion; 1972 - $28 billion; 1973 - $33 billion. IV. These f i s c a l developments have played their part in the great inflation and the upward trend of interest rates since 1964. They go a considerable distance in explaining the underlying inflationary trend of our economy. The explosive increase of the p r i c e l e v e l during the past year (September - September wholesale p r i c e s - 17%; consumer p r i c e s , 7 1/2%) cannot, however, be laid solely or even mainly at the door of our f i s c a l or monetary policies. Nor can we blame the trade unions, which in other y e a r s — notably between 1969 and 1971 - - e x e r c i s e d a powerful upward push on costs and p r i c e s . Let m e take two or three minutes to sketch the special and extrapolating developments in the price sphere during the past y e a r . -4- (1) The f i r s t fact to notice is that the inflation this past year has been on a world-wide s c a l e . Consumer price level Germany 7% France 8% Canada 8% Gt. Britain 9% Italy 2% Japan s imilar (2) 12% of smaller countries. This w o r l d - w i d e inflation reflected a world-wide e c o n o m i c boom - Usually, economies of individual countries trace out divergent trends. Now and then, however, all or m o s t industrial countries find themselves in the same phase of the business c y c l e . Such an unusual coincidence of economic expression o c c u r r e d last year. Now, in the course of an economic boom, people are m o r e willing to use the money they have, money turns over m o r e rapidly - - the consequence inevitably is that shortages soon appear in different s e c t o r s of the economy, and prices go up -5- this happens even when f i s c a l and monetary policies are entirely neutral. (3) Another complicating factor during the past year was the accident of bad harvests - - c r o p failures --in many countries. The result has been an run-up of f a r m prices and food p r i c e s . (4) Still another complicating factoi was the r e s t r i c t e d capacity of raw material producing industries in our country - - paper, wood pulp, steel, aluminum, m a n - made fiberts, etc. - - t o expand production. This was a result of low investment in these industries in recent y e a r s , which in turn was due to abnormally low profits f r o m 1966 to 1971. (5) There w e r e till other complicating factors - the developing shortages in the energy field, reflecting among other things - - the e x e r c i s e of monopoly power by foreign producers; m o r e important still, the depreciation of the dollar in foreign exchange markets which caused sharp advance in the p r i c e s of all imported goods; and this adscance spread out to domestic substitutes, to products fabricated f r o m foreign materials - - a c r o s s the board. -6- (6) In view of the powerful special f a c t o r s that I have noted, and the c y c l i c a l expansion of our economy, a sharp advance in our price level would have been practically inevitable this y e a r . There was not much that we could have done about it. But our governmental policies have also not dealt vigorously enough with our underlying inflationary problem. (a) F i r s t , a word about monetary policy Began moving toward restraint in March 1972. In retrospect, degree of restraint should have been somewhat greater. This situation has now been fully c o r r e c t e d . Dec. 1972-Sept. 1972: 4. 2%; Sept. -Sept. 5.4% (b) As f o r f i s c a l policy, energetic support by Administration, with cooperation of the Congress, to restrain expenditures, nevertheless, f i s c a l policy was not restrictive enough Budget deficit in* f i s c a l 73 of over 14 billion dollars, and borrowing of 33, clearly inappropriate in a year of economic boom; -7- (c) As for wage and price controls, they w e r e eased too suddenly last January, and - - w o r s e still - - the relaxation was widely interpreted to mean that controls had virtually come to an end; (d) And our governmental f a r m programs until early this year had been aimed at limiting production instead of encouraging production. V. The accelerating pace of inflation this year is bound to have consequences over the next year or two - - i f not longer - The special factors that caused a p r i c e explosion this year are likely to be on the wane. (1) Agricultural production increasing - - this country and abroad. (2) Industrial capacity of national productivity indicators is beginning to expand. (3) Depreciation of dollar - - encouraging developments. However, the r i s e of consumer p r i c e s , and the strong continuing demand for labor, threaten an escalation of wage demands. Wage rate advances are already creeping up. Hourly earnings: September 1972-September 1973 - +6.6% March 1973 - September 1973 +7.3% -8- This substantially exceeds the prospective increase of p r i c e s . I am not hopeful that the rate of inflation can realistically be expected to fall below a 4 - 5 % range during 1974. VI. To do that well, or no m o r e poorly, will require scrupulous c a r e in the e x e r c i s e of our monetary and f i s c a l p o l i c i e s . I emphasize monetary and f i s c a l p o l i c i e s , because I believe that the effectiveness of wage and price controls is quickly eroding. I do not expect much help f r o m this quarter. As f o r monetary policy, it is entirely clear to m e that while the expansion of monetary and credit must continue, the expansion must be kept within very moderate bounds - - s o that new f o r c e s of inflation are not released. The Federal R e s e r v e Board is f i r m l y r e s o l v e d to do this. I assure you that this will be done. As f o r f i s c a l policy, the need f o r greater prudence and restraint than we had is clearly essential. In June, the Treasury estimated Federal expenditures for this f i s c a l year at 268. 7 Billion. » This estimate was raised by Secretary Shultz last week to 270 billion, and that estimate did not allow f o r the i n c r e a s e in military spending that is likely to result f r o m ominous foreign developments of recent weeks. The balanced budget that Secretary Shultz presented to this Committee t h e r e f o r e looks v e r y fragile to m e . -9- To prevent the release of new inflationary f o r c e s f r o m f i s c a l side, it is vital thtat the Congress proceed with all possible speed to r e f o r m its budgetary procedures - - a subject to which this Committee, and particularly your Acting Chairman, are devoting much constructive thought and effort. A r e f o r m of our budgetary procedures which would put an end to the fragmented consideration of expenditures and which would place a f i r m ceiling on total expenditures, and which would relate these expenditures to prospective revenues and the nation1 s economic needs - - has b e c o m e an absolute necessity. If such a r e f o r m is accomplished this y e a r , our country will finally be in a position to put an end to the inflation that has been plaguing our economy. Effective budgetary r e f o r m is by far the m o s t important contribution that the Congress can make to the soundness of our economy and the e c o n o m i c w e l f a r e of our people. I also hope that this Committee, once it has disposed of the trade bill and the debt ceiling, will carefully consider ways and means of using tax policy as an instrument of economic stabilization, so that we will not need to r e l y - - a s heavily as we have in the past and as we are now doing - on monetary policy.
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