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Chairman HUMPHREY. All right. And if we have recovery of any degree, it will be even less than the current projection?
Secretary SIMON. Well, based on our projections, it will be $43 billion.
Chairman HUMPHREY. Well, that is about $30 billion less than last year.
Secretary SIMON, $30 billion less than the fiscal-
Chairman HUMPHREY. All right, but what makes you think there is going to be more crowding out when the deficit is less and the recovery has some of its own momentum?
Secretary SIMON. Because private demands are going to grow. Chairman HUMPHREY. The private demands are going to grow. That is true. But, my goodness, there is a great deal of difference already in the projected deficit of the last year as compared to the projected deficit for next year.
Secretary SIMON. There is also another very important point. Economists us the symbol, “net new money raised in the marketplace." And I have always had some great problem with the net new money raised because of the massive debt rollovers that we have in the Treasury Department now. We used to have what we called quarterly refundings. But I have been filling up the financing slots at such a rapid pace, I think we can look forward to the day when we are going to have almost weekly refundings.
Chairman HUMPHREY. Here is the story that the average citizen gets. Look here at what Business Week says: “Bank loans to business have been slowing. So banks are buying more Treasury bills. Interest rates are continuing to slip and the money supply is flattening out."
Now, all the talk that we heard a year ago from you and others was that we were going to be in this terrible crowding out crunch. It hasn't happened. Now you are pushing it up another year.
Secretary SIMON. Wait a minute. No, sir; you go back and look at the printed words in my testimony, Mr. Chairman, which said it is going to occur in 1976 and beyond as the economic activity rises. When you talk about what has happened to business loan demand, of course business loan demand is off. No. 1, take a look at the largest inventory reduction in our history. So, obviously, there has been a paydown. But, with consumer spending and retail sales as they are right now, you can reasonably expect a pickup in the months ahead.
Chairman HUMPHREY. OK. We do not disagree on the theoretical dangers of the theoretical problem of crowding out. I don't disagree with that. What I am trying to say, and I think the evidence thus far supports my contention, is that at a time of 8 percent unemployment, at a time of less than adequate use of our plant capacity the possibilities of crowding out, as a constraining force of the money available to private industry does not seem to be documented by the current facts. Now, you are making a prediction. And what you are really saying is that at the end of calendar 1976–
Secretary SIMON. These are judgments as to when it will happen. Chairman HUMPHREY. At the end of calendar year 1976, there is going to be a very serious problem of crowding out. I would like
to ask you to do this—and I will cease and desist: Does the Treasury prepare estimates of supply and demand for funds, broken down by a major category, usually called sources and uses of funds? Could you make those available to us?
Secretary SIMON. I certainly will.
[The following information was subsequently supplied for the record :]
1 Based on the economic assumptions used in the budget for 1976 and 1977.
1 Based on the economic assumptions used in the budget for 1976 and 1977 and on 6.3 pct increase in Ml and 9 increase in M2 both years.
Note.-Office of the Secretary of the Treasury, Office of Debt Analysis, Jan. 23, 1976.
Chairman HUMPHREY. I think that will be helpful to us in terms of resolving what is a legitimate difference of views as to where we are going. I don't want my remarks interpreted as that private capital should not have the sources available to it for its expansion. I believe in investment, I know that capital formation is important. But nothing is worse to the economy than capital that is dormant and unused. Dormant capital is really like unemployment; when you've got unused labor and unused capital, you've got two depressents on the economy. I must confess that I was really shaken when I read in the February 9, issue of Business Week, which says:
The Federal Reserve and the Nation's big commercial banks now have a dilemma in common. The Fed insists it wants to stimulate the money supply and promote economic recovery by getting banks to loan more money to busi
ness. The banks are busily looking for loan customers, but are unwilling to cut prices or shade their new, tougher credit standards to get it. The problem is that the very businessmen who normally rely on bank money insist they really do not need much of it today, producing what economist Leonard Santow calls a mismatch. And according to Santow, the banks do not want to lend to companies that need the money and the companies that the banks want to lend to do not need the money.
What is new? That is exactly what has been going on. That is what the whole ball game is all about. The people who don't need the money can get it; the people that need the money, the guy that is struggling for his life, they say "Well, you can't meet my credit standards.” This is what has gone on in this country for several years, and this is why there are bankruptcies and this is why the housing industry is in trouble.
General Motors doesn't have to worry. They have a line of credit. But the little stores really have to worry, because they don't have that line of credit. This is what we have been arguing about in regard to the prime rate, which is about as meaningful to the average citizen as blowing bubbles in a sand storm. It doesn't mean a thing. What is important is the going rate.
So, I am just kind of an old-fashioned practical kind of guy, out from the woods that takes a look at what happens to the fellow out there who wants to borrow some money. And the people who want to borrow can't get it; and the people that don't need it, they say, "Hey, would you like to have a nice big platter-full of loans?”
Secretary SIMON. Thank you for confirming my theory of crowding out.
Chairman HUMPHREY. There is no crowding out.
Secretary SIMON. That is exactly what it is. You are crowded out by the high interest rates in the marketplace, by the flight to quality, by the inability to borrow by the lesser corporations. General Motors and the rest of them can get it.
Chairman HUMPHREY. There is a lot of money lying around. You and the Fed should get the banks and tell them they'd better start using it. Because when this capital is not used, it is unemployed. Like unemployed workers, unemployed capital is a curse on an economy that depends on the marketplace. If I know anything about economics, I know that.
What is our problem today? If our problem is Government policy, then maybe we should get working to change the rules. Whatever it is, there is capital waiting there and it isn't being used. It is not being crowded out. It isn't being used. That is my judgment, anyway.
Secretary SIMON. You have good judgment.
Representative LONG. Yes, I do have two short questions. One is a request for the record, Mr. Secretary, but before I get to that, let me ask this. In the President's budget for this year, the proposition that business in high unemployment areas, which, if I recall correctly, was 7 percent or more
Secretary Simon. Yes, sir.
Representative LONG [continuing]. Be allowed to depreciate new investments in plant and equipment at a faster than normal rate. On the face of it, it appears to be a very attractive type of situation, and one generally I would favor.
am lookentire specure. It Maybe it
· The budget estimates of the cost to the Treasury of this tax writeoff would be about $300 million for fiscal year 1977.
Secretary Simon. $369 and eventually $1 billion.
Representative Long. And, as I say, on the face of it, such a program looks very good. But, if we look at the capacity utilization across the entire spectrum of the economy, we begin to get to a little bit of a different picture. It is somewhere about 75 percent, at least to the best of my knowledge. Maybe it is a little more than that, or maybe a little bit less than that. And I wondered if, in coming forth with that proposal, if you all had any evidence that areas of high unemployment are closer to fully utilizing the existing capacity of plant and equipment than is the rest of the economy? Because I strongly suspect that what it really is, is that they have a lower utilization than you do in the economy at large. And I wonder if, in view of that, if this is really a wise policy?
Secretary SIMON. I have no knowledge of any study that has ever been done or, indeed, Congressman Long, could be done that could quantify present capacity in hundreds of thousands of companies that exist. I will say one thing, though, and this is pretty generally agreed to, that at best the government's capacity numbers are suspect. Back in 1971, when we were pulling out of the recession, everybody was talking about 4 or 5 years and then we would get back to full utilization again. And full utilization means different things to different industries. And normal full utilization is about 85 percent-and again, our numbers are somewhat suspect—but we found that we got back to full capacity again in 1973 and 1974. And the bottlenecks, Mr. Chairman, which you correctly referred to, appeared very early in some of our basic industries. And this is what is in danger of happening again. When certain basic industries reach the peak before others, the price pressures become apparent in some of our great basic commodities.
Representative Long. But the point you are making runs all the way across the business spectrum, Mr. Secretary, and unless there is some justification for showing that the capacity is used to a greater extent than 75 percent, or at least equal to what the national average is, it seems to me that the basis of the recommendation that we have given in these high unemployment areas, well, is at the very minimum, Mr. Secretary, suspect.
Secretary SIMON. No. If we know within reason—and again this is suspect--that we have approximately 72 or 73 percent capacity utilization in our economy and we have an unemployment rate unacceptably at an 8.3-percent level. We know also that the construction industry is probably one of the most severely impacted in the area of unemployment. So if we talk about building plants and expanding existing plants today, it has a twofold benefit: It puts the construction industries back to work in the initial stages, if you will; and it starts plant expansion and new plant building before we move back to full capacity again. Hopefully, this transfers activity that would have occurred next year and the year after into this year when there is a slack in the economy and when there is high unemployment.
Representative LONG. Doesn't it follow, Mr. Secretary, that if Tou've got an area where they are not even using their existing