Blueprint for Balance

Like any citizen who is spending more than he makes, the U.S. Government is doing a poor job of running its fiscal affairs. How can it do better?

To find out, a bipartisan Senate-House subcommittee, headed by Illinois' Democrat Paul H. Douglas (TIME, Jan. 16), put this question to almost 500 U.S. economists, bankers and federal officials. Last week, in a clear, plain-speaking 50-page report that was notable for its lack of political partisanship, the subcommittee laid out a blueprint to put the U.S. fiscal house in order.

Its most important conclusion was that in prosperous times like the present the federal budget, instead of running $5.6 billion in the red, should be balanced. Admittedly, the U.S. should not commit itself to balancing the budget every year, the subcommittee said, for that would mean "drastic increases of tax rates or drastic reductions of Government expenditures during periods of deflation and unemployment, thereby aggravating the decline." But if the U.S. ran into the red in depression years, it had to show a surplus in prosperous years--and that meant now.

The subcommittee made no mention of doing this by a tax increase or a cut in vital expenditures, but simply by removing "waste in government." That meant no hit-or-miss reductions, but a paring down all along the line. "The quest for economy," said the subcommittee, "must be continuing and unrelenting; it must not be limited to any one phase of the business cycle."

Job Not Done. The ups & downs of the business cycle, the subcommittee found, could be evened out if the Government wisely used its broad fiscal, credit and monetary powers. The Government should rely on its powers rather than on the system of direct controls, i.e., price and wage controls. The use of fiscal powers is "more consistent with the maintenance of democracy and . . . free competitive enterprise," said the report, than would be the only alternative--"an elaborate system of direct controls."

In the current boom, the Government has failed to make full use of its broad fiscal powers, said the subcommittee, chiefly because of the family rows between the U.S. Treasury Department and the Federal Reserve Board. The chief task of FRB should have been to restrict credit during the boom, by forcing interest rates up. But the Treasury, insisting on a cheapmoney policy, fought any change, because a change would have meant an increase in the cost of carrying the U.S. debt. Time & again FRB failed to do its job, and went along with what FRB's Marriner Eccles called the Treasury's "general easy-money bias under almost any and all circumstances."

Job to Do. In support of FRB, the Douglas subcommittee recommended that Treasury's easy-money policy be reversed --"even if the cost should prove to be a significant increase in service charges on the federal debt . . ." Since FRB apparently "was not willing to assert its independence" over Treasury, Congress should pass a resolution making it clear that FRB has "primary power and responsibility" in these matters. Added the subcommittee: "Flexibility of interest rates, without which a flexible monetary policy is impossible, should be restored." And to build up "the quality and prestige" of FRB, its members' salaries should be raised (from $16,000 to $20,000, with $22,500 for the chairman), and the size of the board reduced from seven members to not more than five.

The success of fiscal control, the subcommittee said, depends on its flexibility. The economic picture changes so fast that other means of combating inflation & deflation (e.g., public works) cannot be started or stopped quickly enough. Most important, FRB should base its policies on current conditions, and not on predictions of the future by "official economic forecasters." Their "poor record warns us of the danger" of relying on them.

The subcommittee also recommended:

P: Repeal of the silver purchase laws which have forced the Government to buy $1,509,400,000 of silver since 1933 for which it had no use. Said Subcommittee Chairman Douglas: there are "only 16 reasons" for the silver subsidy--"the 16 Senators from the Western Mountain states."

P: No return to the gold coin standard, because "unlimited convertibility of our money into gold would be neither a reliable nor an effective guard against serious inflation. [It would not] promote wise monetary and credit policies."

P:Postponement of an increase in federal insurance on bank deposits (from $5,000 to $10,000) until Congress has a chance to study the situation.

P: Establishment of a National Monetary and Credit Council, composed of the chiefs of the Government's financial agencies, to coordinate and keep sharp watch over the sprawling money-management activities.

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