It Can Cost More Than It Is Worth

THE DEBT CEILING

A PRIME financial question confronting the Administration is whether or not Congress should be asked to increase the national debt limit beyond its present $275 billion ceiling. The federal debt last week stood at $273,351,797,516.09, only $1.7 billion under the legal ceiling and with seven months still to go in fiscal 1958. The Treasury steadfastly maintains that it can squeeze by under the ceiling. But many Administration economists doubt it. They argue that the debt limit must be raised, not only so that the U.S. can go on paying its bills, but also because the $275 billion ceiling has outlived its usefulness.

Exactly how the Treasury expects to achieve its goal is a mystery. Fiscal Assistant Secretary William T. Heffelfinger, manager of the public debt, has flatly refused to release the all-important estimates of Treasury income v. outgo. Yet it is no secret that there will be one crisis after another until March 15, when heavy corporate tax payments start pouring in. From October through February, Treasury income is at its lowest point, while expenditures continue at their high level. In fiscal 1957, for example, the U.S. Government collected $24.4 billion from October through February, but spent $29.2 billion. Realizing its predicament, the Treasury got Congress to boost the debt limit temporarily to $278 billion until income picked up again. Early this year the Treasury thought it could get by, asked for no increase. But since then, estimated expenditures have gone up, while income may well decrease as a result of the business decline.

In actual dollars and cents, the total obligations of the U.S. already exceed the $275 billion debt limit, though technically the Treasury's books still show a $1.7 billion leeway. The Federal National Mortgage Association and the Agriculture Department have issued $2.8 billion in notes and debentures held by banks and private investors. These do not show up as part of the "national debt," though they are Government obligations.

And the Treasury can add still more to its actual obligations without technically adding to the debt. Fannie May recently offered the public $802 million worth of notes, backed by the mortgages it holds, then used the proceeds to pay back part of the $1.8 billion it had borrowed from the Treasury. Agriculture's Commodity Credit Corp., which has some $350 million in public loans, could also go into the open market, as it did in 1953 and 1954, float $1 billion or more in loans through "certificates of interest" on the surplus crops it holds. As a last resort, the Treasury can also draw down its $3.4 billion cash balance, i.e., uncommitted money in the till, to pay bills. Yet even with such devices, says Assistant Secretary Heffelfinger, "the debt may be right at the roof before we see our way clear."

Whether the Treasury makes it or not, many economists agree that it is high time for the U.S. to realign its thinking about the $275 billion ceiling since fiscal 1959 may bring even more serious debt management problems with heavier defense outlays in prospect (see NATIONAL AFFAIRS). The main value of the $275 billion figure has been to act as a psychological drag on Government spending. Originally set in 1946, when the debt was $269 billion, the ceiling was low enough to remind the U.S. of the need for economy, but high enough to give the Treasury leeway in its operations. But the Korean war pushed the debt right to the ceiling. Ever since, the Treasury and the Administration have been in such a constant struggle to manage the nation's finances that the ceiling often costs more than it is worth.

The Treasury is often unable to take advantage of fluctuating short-term interest rates to refund big amounts of the debt lest it go through the ceiling, must often borrow at times during the year when seasonal demands of business make money tightest and most expensive. Another problem is that such independent borrowers as Fannie May usually cost the U.S. more in the long run. With a lower credit rating, Fannie May pays an average 3.96% interest for the money it borrows v. an average 2.78% for the Treasury itself. The ceiling also costs the U.S. money in departments that have nothing to do with the Treasury. Said one Washington economist: "I've seen the Navy cut back a program because it was afraid to spend money during a pinch, fire trained workers, then hire new workers later on and train them all over again when the pinch was over."

For all these reasons, many a financial expert thinks that the U.S. must not only lift the debt limit; it must also change the way it thinks of the debt. When the ceiling was put on, the debt was 130% of the gross national product. But as the economy grew, the comparative size of the debt shrank until now it is only 62% of the gross national product. Thus, the federal debt could be doubled--and the burden would still be less than it was ten years ago.

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