Chapter 4

Extending and Broadening Economic Progress

THE

HE LEGISLATIVE PROPOSALS presented in this chapter and in the three preceding Economic Reports have been designed to implement the Employment Act by fostering, guiding, and complementing private economic activity. The accent and detail of these programs have varied according to economic conditions and prospects. But in every case they have been shaped by three common objectives: to strengthen our enterprise system, to enlarge our national resources, and to improve our level of living. The proposals put forward in this chapter seek to achieve the first of these objectives by maintaining sound public finances, improving private financial facilities, promoting thrift, strengthening competition, widening opportunities for small business, and strengthening economic ties with other countries. The second objective leads to proposals for increasing our public assets where needed, developing our human and natural resources, promoting agricultural adjustments, and assisting local areas that experience persistent unemployment. As steps toward the third goal, proposals are advanced for improving housing, health, and personal security. The program as a whole is designed to consolidate the economic gains already achieved and to strengthen the base for further progress.

MAINTAINING SOUND GOVERNMENT FINANCES

Expenditures of all Federal, State, and local agencies currently account for nearly one out of every five dollars spent on goods and services in the United States. This fact provides a measure of the magnitude of governmental demands in our economy, whether or not they involve a budgetary deficit, and emphasizes the importance of wise and responsible budget policy at all levels of government.

Three fundamentals of budgetary policy have guided the Administration in conducting the fiscal affairs of the Federal Government in the last four years. First, there is the strict discipline which the budget properly exercises over expenditures. While adequate provision must be made for essential services that Government is in the best position to provide, the test of essentiality should be firmly applied. This principle of budgetary policy leaves no room for operations of the Federal Government that are not truly necessary, or that can be performed better and more economically through private efforts or by State or local governments. A second major principle

of budgetary policy derives from the fact that large governmental expenditures inevitably place a heavy burden of taxes on the economy. This burden must ultimately be borne by the individual citizen, wherever and however the taxes are levied. Sound fiscal policy distributes the tax burden as fairly as possible and imposes the least possible restraint on those incentives-to work, to save, and to invest-that are basic both to our system of competitive enterprise and to the growth potential of the economy. A third aspect of fiscal management, which has rightly received increased attention in recent years, is that the financial affairs of Government should be so administered as to help stabilize the economy and to encourage sound growth. The principle of flexibility in fiscal policy calls for relating the budget as far as feasible to economic conditions, helping to counteract inflationary or deflationary tendencies as the situation requires.

These fundamentals of budgetary policy also provide sound guidance today. The present situation requires that Government expenditures be kept under close control. Increases should be limited to clearly essential needs, and reductions should be achieved wherever possible. In this way the Federal Government can avoid adding unnecessarily to the pressures to which the economy is already subject. The legislative proposals presented here have been formulated with this consideration in view. The Congress, also, should scrutinize with special care all suggestions for legislative action that would place additional burdens on the Federal budget. In view of the budgetary outlook and prospective economic conditions, present tax rates should be continued so as to preserve a high level of revenue and to permit a further reduction of debt. The excise rates on automobiles and parts, cigarettes, distilled spirits, wines, and beer, and the tax rate on the income of corporations, should be retained at their present levels for another year. Certain proposals for tax adjustments for small business concerns are discussed in a later section of this chapter.

The maximum limit set by the Congress on the size of the Federal debt is now $278 billion, but it will return to $275 billion on June 30, 1957, in accordance with present law. The current outlook for budget surpluses available for debt retirement both this year and next, together with a steadily improving seasonal distribution of revenue, should permit the Treasury to operate within the $275 billion ceiling during the fiscal year 1958. This will be true, however, only if expenditures are kept under close control by both the Executive and the Congress and if tax revenues come up to expectation.

The expenditures of State and local governments are now about half those of the Federal Government, and their recent rate of increase has been considerably higher. The principal objects of this increased spending are schools, highways, and the variety of community facilities required by population increase and the rapid growth of suburban areas. In view of the exceptionally high demands for the labor, materials, and equipment needed to carry out these projects, it is inevitable that not all of them

can go forward as rapidly, or on as large a scale, as may be desired. Financial considerations also may require some rescheduling of proposed projects, since State and local governments with large borrowing requirements have already encountered heavy competing demands in the capital markets. Some improvement in the ability of these governmental units to finance their projects would result from an amendment of the Internal Revenue Code to extend the "conduit principle" to regulated investment companies that hold their assets in State and local securities. The amendment, which would involve no loss of revenue, would permit regulated investment companies of this type to pass through to their stockholders the tax-exempt status of the income received on State and local securities. The Congress is requested to enact legislation to accomplish this result.

The Economic Report of January 1956 recommended that State governments review State and local debt limits and other legal restrictions on borrowing for public works. The pressures on debt limits have increased in the past year. In view of the heavy prospective capital expenditures required of State and local governments, and the fiscal capacities of these governments, existing legal limits on the amount of debt and interest rates may in some cases still not be realistic.

IMPROVING PRIVATE FINANCIAL FACILITIES AND PROMOTING THRIFT The exceptionally heavy demands which economic expansion is placing on credit and capital markets have directed attention increasingly to questions concerning the adequacy of our financial facilities, and of the laws and regulations which govern their operation. Alert to these problems, the Senate Committee on Banking and Currency during the past year made an extensive and constructive investigation of Federal laws affecting financial institutions. The impact on the economy of monetary policies designed to restrain inflationary pressures has also become increasingly a matter of public concern. There is need at this time of a thorough study of recent changes in our financial structure and practices, covering the activities of public as well as private agencies, and of the legislative and administrative steps needed to improve our facilities for meeting credit and capital requirements and for exercising appropriate controls over credit. The State of the Union Message recommended that the Congress authorize a National Monetary and Financial Commission to perform this important task. The Commission should be composed of distinguished citizens of outstanding competence and experience in the range of questions to be studied.

Last year's Economic Report stated that the time was appropriate for the Congress and the Executive Branch to study the need for stand-by authority to set limits, whenever required by economic conditions, on the downpayment and maturity terms of instalment credit for the purchase of consumer durable goods. At the request of the President, the Board of Governors of the Federal Reserve System undertook a comprehensive study of the subject early in 1956. The full results of this study will shortly

become available. They will serve as a useful guide in determining whether legislative action is desirable.

The Congress is requested to give favorable consideration to proposals that will be made for strengthening the Securities and Exchange Commission's authority to prevent certain remaining types of abuses in the distribution and sale of securities. Securities legislation must be guided by twin objectives. It must afford adequate protection to the investor and at the same time facilitate the flow of investment funds into legitimate business undertakings. It is important in the latter connection to take due account of the needs of small and medium-sized concerns for capital, and particularly for venture capital.

If a vigorous rate of economic growth is to be realized without recourse to inflationary finance, the supply of savings must be sufficiently high to meet the heavy demands for funds for private, State, and local undertakings. The Federal Government is releasing funds for such purposes by a budgetary surplus and reduction of its debt. But the individual occupies a strategic position in the saving process. The most important contributions that the Federal Government can make toward encouraging individual thrift are to help sustain high levels of employment and income and to preserve the buying power of the dollar. Government can also help by making needed adjustments in the rate of return on savings, where maximum limits are set by law or by administrative action. The recent action of the Federal Reserve authorities and the Federal Deposit Insurance Corporation in raising the upper limit of interest rates on time and savings deposits at commercial banks was designed both to give positive encouragement to additional saving, and to place these forms of savings in a better competitive position relative to other forms.

STRENGTHENING COMPETITION

The capacity of our free economy to grow and to spread its benefits widely derives in large measure from the discipline provided by competitive markets. It is this discipline that converts the natural drive for selfadvancement into a constructive social force and curbs the misuse of economic power. The preservation and strengthening of competition must, therefore, be a leading objective of public policy. It is not the role of Government to regulate the size of business as such, for large as well as small concerns serve socially constructive purposes in a competitive economy. The essential function of Government in this sphere is to foster a competitive environment in which all segments of business can share fairly in opportunities to realize their potentialities. Vigorous enforcement of the antitrust laws is basic to the attainment of this objective, for threats of encroachment on competition are always present and assume constantly changing forms. Accordingly, the agencies of Government charged with

enforcing the antitrust laws must be constantly alert and must have adequate means to discharge their responsibilities.

Both the Department of Justice and the Federal Trade Commission have in recent years increased the rate of filing new proceedings, many of which affect broad and vital areas of the economy. They have done much also to make Section 7 of the Clayton Act an effective antitrust weapon. The vigorous application of this law provides a strong deterrent to mergers, whether accomplished through the acquisition of assets or by the purchase of stock, that may tend substantially to lessen competition or to create a monopoly. Steps have been taken by both agencies to expedite the disposition of antitrust cases and to follow up on compliance. The Justice Department has made effective use of prefiling negotiations and is making a continuing effort to secure enforcement in actions successfully terminated. Similarly, the Federal Trade Commission has screened over 2,000 cease-and-desist orders since August 1954, to bring their compliance up to date.

To perform their purpose fully, the antitrust laws require not only vigor. ous enforcement but adaptation to changing economic conditions. This fact was recognized by the appointment in 1953 of the Attorney General's National Committee to Study the Antitrust Laws, and by the enactment, in substance, of three of the Committee's proposals. Further recommendations were made last year in the Economic Report and in the Progress Report of the Cabinet Committee on Small Business. The Congress is urged to take favorable action on these proposals. First, to aid proper enforcement of merger and other antitrust statutes, the Attorney General should have the power, where civil proceedings are contemplated, to issue a civil investigative demand, thus making possible the production of necessary documents without the need of grand jury proceedings. Second, cease-and-desist orders of the Federal Trade Commission under the Clayton Act should be made final, unless appealed to the courts. Third, a series of interrelated measures would strengthen the Government's ability to deal specifically with mergers: requirement of advance notification of proposed mergers that are likely to have significant effect on competition; extension of Federal regulation to cover bank mergers by asset as well as by stock acquisition; application of the Clayton Act to mergers where either party is in interstate commerce; and authorization of the Federal Trade Commission, in merger cases where it believes violation is likely, to seek a preliminary injunction before a complaint is filed.

In the field of regulated industries we have departed to a degree from our traditional reliance on competitive market forces and substituted direct Government regulation as a means of protecting the public interest. The Presidential Advisory Committee on Transport Policy and Organization has made recommendations that would free common carriers from certain administrative limitations on their ability to compete. The National Committee to Study the Antitrust Laws called for Congressional inquiry to