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2. AVAILABILITY OF CREDIT

Funds are more readily available to more sectors of the economy today, but again this too reflects the cyclical slack in the economy and not the longer-run secular forces at work here. In the first quarter of 1975 about 5% of all new bond issues were Baa-rated or less. By the fourth quarter, it was almost 10%. (This is still below rates close to 20% at times in 1971 and 1972 however.) More lesser-rated companies are able to finance today. Unfortunately, a lot of these bonds are for shorter duration–5-7 year maturity as opposed to 20-30 year maturity which was the norm not too long ago. This will raise problems in the future since the companies will have to refinance more frequently (referred to as the “rollover” problem in point 4 below). The most important issue immediately ahead is whether such lesser rated companies, will continue to find the necessary funds to sustain the economic advance. When credit markets eventually tighten (as is inevitable), problems of credit availability will occur and their severity will be directly proportional to the relative borrowings of the government.

3. FINANCING OF DEFICIT The relative "ease" with which the Federal government financed the deficit in 1975 should not be viewed as a normal state of affairs. The fact is that private needs for credit were low because of the recession but as the recovery gains momentum this year, private credit needs will rise. For example, total short-run business borrowing declined in 1975 by about $14 billion; this year it is expected to rise by about $20 billion which is a swing of almost $35 billion. What this means is that there will be a much higher need for total credit in 1976 than in 1975 and eventually some private areas will be squeezed. This is why it is imperative to take steps now to limit the rise in Federal government spending (up almost 40% in just two years time). Not only is future flexibility lost if this cannot be accomplished but the deficit will remain huge and some private areas will not be finančed.

4. FINANCIAL STRUCTURE

Over the past decade there has been a strong trend towards a much more leveraged and brittle structure of corporate balance sheets. Debt has roughly tripled, liquid assets have declined relative to liabilities, and the debt-equity ratio has about doubled. Sustained high Federal budget deficits will eventually create pressures in financial markets that will cause difficulties for lesser-rated companines (in terms of debt rollover) let alone leave sufficient credit for expansion needs.

5. CAPITAL FORMATION Several studies clearly point to a much heavier need for investment over the next several years if there are to be enough jobs for a growing labor force, a healthier environment for our people and a higher degree of energy self sufficiency in the United States. (The share of business investment in GNP must increase from an average of 10.4% over the past 10 years to 12.0% for the rest of this decade-an historically unprecedented change.) Sustained high Federal budget deficits will automatically frustrate the fulfillment of those capital needs by depriving many, many private areas of needed financing to build the new factories and buy the advanced machinery. The real dimension of crowding out becomes much more persuasive and severe the further ahead we look.

CONCLUSION Crowding out is a genuine problem whose major economic impacts will occur ahead if something is not done about excessive Federal budget deficits caused by too rapid a rise in government spending. The serious nature of this issue should not be masked because of the impacts of a recession. If steps are not taken to exercise better fiscal control, some areas in the private sector will go without needed financing; capital formation will be less than desired; and our serious unemployment and inflation problems will be that much further from a satisfactory resolution. The following excerpts from Professor Paul McCracken's article on the January 8 editorial page of the Wall Street Journal is a well articulated discussion of budget deficits and the phenomenon of "crowding out":

"There is here, however, a more substantive problem. It is the failure of conventional fiscal policy wisdom to face the full implications of the fact that an increase in the federal deficit, from accelerated spending or more tax reduction, must be financed. And the added funds that the Treasury must then borrow are funds not then available to others in the market for financing. ...

"Markets have, of course, substantial capacity for accommodating to changes in demands, and effects on other borrowers of swings in budget deficits of modest proportions will not be large. When, however, the U.S. government had to raise funds at the rate of $81 billion per year in the first half of 1975, after a $5 billion pace a year earlier, the 22% decline in money for home and commercial mortgages during that period can hardly be assumed to have been an entirely unrelated development.

“The question was never whether a large deficit would cause a disintegration of financial markets, or a collapse of capitalism, or some other catastrophe of draconian proportions, though some have pointed to the absence of such cosmic disaster as evidence that the "crowding out” theory was wrong. The point is the quite common sense one that in financial markets where demands for funds are active, and this is apt to characterize 1976, other claimants for funds will get less than if the large Treasury requirements were not present in the market. The financing "oop" of fiscal policy must be closed.

"This all carriers with it some implication for budget strategy in 1976. Within the limits of fiscal discipline that the political process can muster in a quadrennial year, the Congress and the President can continue efforts toward regaining better control of spending without having to worry about the net adverse effect of this fiscal restraint on the economy. Dollars not borrowed by the Treasury will be put to work by other claimants in the money and capital markets. And housing would be a major beneficiary of the easier financial mar. kets that would result. The basic 1976 trend for interest rates, in fact, is more in the hands of those who manage the budget than of the Federal Reserve."

Representative Long. I am sure a few of the members of the committee have some questions they would like to ask you.

Congresswoman Heckler.
Representative HECKLER. Thank you, Congressman Long.

Well, Mr. Secretary, as always I enjoyed your testimony. You are one of my favorite members of the Cabinet. However, I have to say that in view of the fact that we have two committee meetings this morning, I am beginning to feel inundated in a sea of words. I would not want you to have to report to the Commission on Paperwork. With a 21-page prepared statement, sir, isn't it possible to make your points and then reserve the rhetoric for your responses to the answers?

Secretary SIMON. Let me explain. Quite often I deliberately do that, Congresswoman Heckler, I have had seven testimonies or will have by tomorrow, during the last 5 business days. We have drafted this document. My staff does all the basic work and I do all the rewrite work. We work together. I would hate to tell you how many hours we spent on this. I have a basic pessimism, knowing the amount of time you have to spend on so many general matters as it relates to all the various areas you are trying to cover, that if I didn't make some of the very strong points I make here and make them verbally, after all this work, that you would not have the time and many would not have the inclination to pore through something that one could honestly say is pretty boring stuff, because economics is a dismal science. I do have very strong feelings about how we got here and how we are going to get out. I have spent a great deal of time attempting to make important points about why our policies are what they are and what they are designed to do. That is why I read it. I know it is tough. I tried to summarize and most of the time I do.

As I said, this big document has been the mother document, if you will, for all my other testimonies on the economy and our economic policy. I felt that if I could get the majority of the people on this important committee just to catch a few of the points I was trying to make—and you might not agree with me—but I thought at least you would have an idea generally of what we are doing.

Representative HECKLER. I think many of the points are well taken, but noting your ability to handle questions, I think the rhetoric could also have been fully covered in your responses. Nonetheless, since I hope to get to another committee this morning as well, I feel perhaps somewhat pressed for time today. Well, that point has been made.

One of my great concerns here is this question of the social security tax. Having many senior citizens in my district, I wondered whether or not you or any of your staff members have made comparisons or studies showing the net effects of your proposed social security rate combined with the proposed tax cut for lower- and middleincome-level families?

In other words, is there going to be a net increase, a net benefit, to the lower income level family with the social security changes proposed by the President?

Secretary SIMON. We are in the process of doing an economic analysis by income group, which we will supply for the record when it is completed.

[The following tables were subsequently supplied for the record :]

PROPOSED TAX CHANGES-SINGLE PERSON WITH ITEMIZED DEDUCTIONS OF 16 PCT OF ADJUSTED

GROSS INCOME

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1 Based on a single person without dependents, under 65. If standard deduction exceeds itemized deduction, uses standard deduction.

? Employee's share of FICA contributions only. Includes effects of proposed increase of rate from 5.85 pct to 6.15 pct, effective San. 1, 1977. Also, it is projected that the ceiling on taxable wages will rise to $16,500 in 1977. The 1975 level was $14.100

a Increases for households at these income levels are at a maximum beca e. aside from the general rate increase they are affected by the fact that additional wages will be subject to tax.

Note.-Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 9, 1976.

PROPOSED TAX CHANGES—MARRIED COUPLE-1 EARNER WITH ITEMIZED DEDUCTIONS OF 16 PCT OF ADJUSTED

GROSS INCOME 1

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1 Based on a married couple with no dependents, both under 65, whose income consists entirely of the salary of 1 spouse. If standard deduction exceeds itemized deduction, family uses standard deduction. > Employee's share of FICA contributions only. Includes effects of proposed increase of rate from 5.85 pct to 6.15 pct.

Also, it is projected that the ceiling on taxable wages will rise to $16,500 in 1977. The 1975 level was $14,100.

* Increases for households at these income levels are at a maximum because, aside from the general rate increase, they are affected by the fact that additional wages will be subject to tax.

Note.-Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 9, 1976.

PROPOSED TAX CHANGES-MARRIED COUPLE-2 EARNERS WITH ITEMIZED DEDUCTIONS OF 16 PCT OF ADJUSTED

GROSS INCOME 1

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1 Based on a married couple with no dependents, both under 65, whose income consists of the salaries of both spouses. evenly divided. If standard deduction exceeds itemized deduction, family uses standard deduction.

Employee's share of FICA contributions only. Includes effects of proposed increase of rate from 5.85 pct to 6.15 pct. effective Jan. 1, 1977. Also, it is projected that the ceiling on taxable wages will rise to $16,500 in 1977. The 1975 level was $14,100.

o increases for households at these income levels are at a maximum because, aside from the general rate increase, they are affected by the fact that additional wages will be subject to tax.

Note.-Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 9, 1976.

PROPOSED TAX CHANGES-FAMILY OF 4–1 EARNER WITH ITEMIZED DEDUCTIONS OF 16 PCT OF ADJUSTED GROSS

INCOME 1

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1 Based on a married couple with 2 dependents, both under 65, whose income consists entirely of the salary of I spouse, li standard deduction exceeds itemized deduction, family uses standard deduction,

* Does not include earned income credit; with credit, figures would be as follows:

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* Employee's share of FICA contributions only. Includes effects of proposed rate increase from 5.85 pct to 6.15 pct elective San. 1, 1977. Also, it is projected that the ceiling on taxable wages will rise to $16,500 in 1977. The 1975 level W33 $14,100.

Increases for households at these income levels are at a maximum because, aside from the general rate increase, they are affected by the fact that additional wages will be subject to tax.

liote.- Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 9, 1976,

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