Secretary William E. Simon, U.S. Secretary of Treasury

Landon Lecture
March 18, 1975

Restoring our Prosperity

President McCain, Governor Landon, members of the student body, and ladies and gentlemen.

It is a privilege to be here today and to bring you the warmest greetings of the President of the United States.

Some of the speakers in this lecture series come here because they enjoy talking with the students at such a distinguished university. Others come because this is Kansas, the heartland of America where a man can renew his sense of what this nation is all about. But most of all, people come because they share a deep sense of affection and love for Alf Landon, and they want to join in tribute to him.

I was only eight years old when Alf Landon ran for the Presidency. He made little impression on me then, of course, but as the years have passed, his philosophy, his zest for life, and his love of freedom all of these have struck a resonant chord with me, and like millions of others, I have come to revere Alf Landon as one of the grand old men of our age.

A few weeks ago, one of our television stations in Washington carried a fascinating interview with Governor Landon, conducted by columnist George Will. Mr. Landon related that early in this century, when he was head of a fraternity chapter at the University of Kansas, he abolished ice cream at student meals and even reduced the number of orchestras at the spring lawn party from two to one.

Why did you do such an unpopular thing, he was asked.

"You might say that I belong to that old lost tribe," he replied. "We were in debt. . . and we had to pay our bills."

In that short, characteristic answer, Alf Landon captured the central core of a philosophy that over the years has unfortunately become an endangered species. Indeed, events in Washington are now threatening it with total extinction. And yet it is that view of life, I believe, which must be revived if the next generation of Americans, your generation, is to enjoy the blessings of liberty and abundance that should be your inheritance.

What Are the Central Issues?

Today I want to talk with you about some of the economic debates now underway in Washington. Rather than addressing the differences between specific proposals for cutting taxes or saving fuel, however, I would like to probe beneath the surface to what I believe to be the central, underlying issues of our times—issues that strike at the heart of Alf Landon's philosophy.

Frequently, those who support bigger government spending programs and greater governmental control over the economy are pictured as socially progressive, men and women of compassion who care about the problems of the little people. On the other hand, those who believe that the government does not have the ability to solve every problem and that instead we should be strengthening the free enterprise system are caricatured as a new generation of economic royalists who are indifferent to human suffering and care only about fattening the golden calf of big business.

These characterizations would mean little, except for the fact that they are so blatantly phony. My experience in Washington has convinced me that almost every man and woman in a position of high public trust cares deeply about the welfare of our people, especially those who are impoverished or face disadvantages because of their sex or the color of their skin. The central question is not who cares the most, but how we restore our prosperity and reduce human hardships without sacrificing our freedom or destroying the most successful economic system that man has ever known.

I submit to you today that if America continues down the road toward greater governmental spending and greater governmental control over our economy, a road that we have been moving steadily down for several decades, then your generation will be robbed of your personal and economic freedoms and you will be condemned to an economy with chronic inflation and unemployment. That is really what's at issue in our economic debates, and those of you who are students have an even greater stake in the outcome than anyone in Washington today.

The Perils of Big Government

Let's look at a few facts about Government spending. For most of our history, a $100 billion federal budget was like the four-minute mile in track: it was a limit that was never broken. Then in 1962, we finally went over the $100 billion mark some 186 years after our Republic was founded. But we were not content to rest on our laurels, dubious though they were. Seven years later, the budget broke the $200 billion barrier, and then only four years later, this year, in fact, we are cracking the $300 billion mark. In the coming fiscal year, we are likely to go beyond $365 billion, so that the government will be spending $1 billion each and every day of the year.

It's difficult for many people to visualize one billion dollars. One way of thinking about it is this: suppose that on the day that Christ was born, a man were given $1 billion on the condition that he or his heirs spent $1,000 every day, seven days a week. How long would the money last? Adding it up, I think you'll find that today, almost 2000 years later, the grandchildren would still not have spent the full billion dollars. Yet our Federal Government will soon be spending $1 billion every single day.

As budgets grow, the Government comes to occupy a more and more dominant role within our society.

In 1930, government spending at all levels federal, state, and local amounted to about 12 percent of our gross national product. Today, because budgets have mushroomed, government accounts for a third of our total national output. And if recent trends prevail, the government's share of the total economy could reach 60 per cent before most of you are 50 years old.

I submit to you when government grows that large, so that you have to give up perhaps half of your earnings to pay its bills, then you will have surrendered a substantial part of your freedom.

Nor should you think that you will necessarily be enlarging the freedoms of those you support with your taxes. As generous and concerned citizens, all of us have a responsibility to help less fortunate Americans. But the welfare system that we have imposed upon low-income people in this country is so riddled with inefficiencies and inequities that it not only wastes tax dollars but, more importantly, wastes the human potential of the poor. It is long past time that we overhauled our welfare system, replacing it with one that is fair, simple and genuinely compassionate.

For taxpayers, the burden of paying the Government's bills has become so heavy that many are ready to rebel against it. Last November, voters across the country turned down some three quarters of all bond issues on the ballot. Politicians realize this, of course, so that some of them will vote to increase spending and the next day will vote against higher taxes.

The result has been a string of Federal budget deficits that are unparalleled in our history. In 14 of the last 15 years, the budget has been in the red. As we approach the 1976 budget, we recognize that the effects of the recession will lower revenues and raise spending, thus enlarging the deficit. What we are confronting in 1976, however, is not a modest or even a large deficit but a monstrous one. If some members of the Congress prevail, our deficit for the coming fiscal year could exceed $80 or even $100 billion. Just imagine: fourteen years after the Federal Government broke the magic barrier of a $100 billion spending level, the deficit on the budget may actually grow to $100 billion.

I wish the television cameras could portray this story as vividly as they could cover the war in Vietnam or the race riots of earlier years. Not enough people are aware yet of what happens when the government piles one big deficit on top of another.

For one thing, as the total federal debt climbs rapidly upwards, we have to pay higher and higher interest costs on that debt. In fiscal year 1976, we now estimate that we will spend $36 billion just in interest payments on the federal debt. That's more than we spent in any single year on the Vietnam War. It's more than a third of our national defense budget. And it's money that could much more productively be spent on needs such as public transportation and better health care. You will also be interested to know that this year, for the first time, the Government is borrowing money that will become due in the 21st century. We are literally living off our inheritance and mortgaging our future at the same time.

A second result of excessive government spending is inflation. When the government spends more than it receives, it creates extra demands on the economy, and if the economy is already producing at nearly full capacity, which is not the case now but has been for most of the last 10 years, those extra demands cause the prices of various goods and services to increase. Heavy borrowing by the government to cover its deficits also increases interest rates and creates strains in money and capital markets. Worse still, continuing deficits undermine the confidence of the public in the government's ability to govern, let alone control inflation. All of these things have happened in the last 10 years, so that the government has become a major source of economic and financial instability within our economy.

When government policies drive up interest rates, they have a direct and immediate impact upon millions of Americans. Many of you here today will soon be looking for your first home. When you do, you will find that the difference between a 6 per cent interest rate and a 10 per cent interest rate for a moderately sized home can mean as much as $100 a month in your mortgage payments. And at 10 per cent interest rates, you may encounter great difficulty in even finding someone to loan you the money. This is a very practical example of the extra costs that consumers must pay if the government mismanages our economy.

To finance its deficits, the government has usually borrowed money from the private financial system. In the process, it has contributed significantly to an excessively rapid growth in the nation's money supply over the past 10 years. From 1955 to 1965, the money supply grew at the rate of 2-1/2 percent a year, and we enjoyed reasonable price stability. Since 1965, however, the money supply has been growing at more than 6 percent a year more than double the previous rate. We have, in effect, been creating far more money than the economy could absorb, and as a result, monetary policy, as well as fiscal policy, has been forcing prices dramatically upwards.

There have been, of course, other special factors which have contributed to inflation, including the quadrupling in the cost of foreign oil and the explosion in food prices. But the basic, underlying cause of our inflation has been the mismanagement of the government's spending and monetary policies. And unless we change this basic direction, inflation will continue to plague us for a long time to come.

We should also recognize that the inflation of recent years, the highest in our peacetime history, is at the root of our current recession. It was inflation that caused a loss in the real income and the confidence of consumers, prompting the sharpest drop in consumer spending since World War II. And it was inflation that helped to dry up the flow of savings into our thrift institutions, driving up interest rates and causing the housing industry to collapse. Consumer spending and housing remain two of the weakest sectors in our economy and account for much of our unemployment. Inflation, then, is a major culprit of our economic troubles and even as we lift ourselves out of this recession, as we will, we must still face up to the long-range challenge of a chronic inflation that is fueled by the policies of big government.

Strengthening the Free Enterprise System

Still another result of the trend toward bigger government has been a definite slowing of our progress toward renewing and rebuilding the strength of our free enterprise system. Let me give you a concrete example of what is now happening. What financial analysts refer to as the "capital market" is really a pool of savings and other funds that are available for private investment. In the past, that pool has been the major source from which corporations have drawn when they want to invest in new plant and equipment. During the coming fiscal year, however, we estimate that government at all levels federal, state and local will borrow between 80 to 85 percent of all new funds available in that investment pool. Less than one dollar out of every five in that capital market will be available for investment in private enterprise; the other four dollars will be gobbled up by the government.

Those figures are especially discouraging in light of our overall investment picture. It is a simple but compelling economic fact of life that increases in productive performance are required over time to support a rising standard of living. Yet, as a Nation, we are rapidly expanding public payments to individuals but neglecting to provide adequate incentives for new investment. Since the early 1960s, the United States has had the lowest level of capital investment of any major industrialized nation in the free world. Some observers believe that on the average, our industrial plants are between two to five years older than those in Japan and Germany. As a result, the productivity of our labor force is also growing more slowly than in those countries.

Not long ago it was fashionable in some circles to believe that we should hold the American economy to a zero growth rate. I trust that the unemployment lines and the suffering that results from economic stagnation will teach all of us how misguided that philosophy is. What we must realize instead is that the only way to create productive jobs jobs that will permit minorities and low-income Americans to advance up the ladder as free men and women is to enlarge and strengthen our economic base. And that means increasing our level of capital investment. Some economists now believe that, on the average, an investment of $20,000 to $30,000 is needed to create each new job in our work force. And to attract that investment, we must prevent the government from soaking up all the available savings and we must allow investors to earn a decent return on their investment, they must be allowed to earn a reasonable profit. I know some of you may wince when we talk about profits. You may think they are already far too high for our own good. Actually, inflation has played tricks with corporate profits, so that some companies seem to be making more money than they actually are. Realistically measured, corporate profits have plunged by 50 percent over the course of the past 10 years. Last year, profits were so low that corporations had almost nothing to plow back into business, but had to dip into their capital reserves in order to make dividend payments. It is not unfair to say that we have been in a profits depression.

Can the Government Do It Better?

How, then, do we restore our economic vitality?

One answer I hear with alarming frequency is that the Government should play a far more active role in regulating the economy. A poll commissioned by Time Magazine showed last week that 69 percent of our people want to revive wage and price controls. There are, indeed, areas in our economy where the public interest requires some form of government regulation. Few people question, for instance, that the nation's telephone system, which is inherently monopolistic, should be subject to public regulation. The growth of government regulation that we have witnessed in recent years, however, has exceeded all bounds of sensibility.

The 1973 automobile, for instance, was subject to 44 different government standards and regulations involving about 780 different tests that had to be met. As the chairman of a major automaker observed, "Government today has something to say about how we design our products, how we build them, how we test them, how we advertise them, how we sell them, how we warrant them, how we repair them, the compensation we pay our employees, and even the prices we may charge our customers."

And let us not delude ourselves about how well the Government can run something once it obtains control. It is no accident that three of the most economically troubled industries in the country today, railroads, airlines and utilities, are also among the most tightly regulated. Let me review a few examples of overzealous governmental regulation in action:

It is almost twice as far from San Francisco to Los Angeles than from New York to Washington, and yet the air fare on the California trip is almost a third cheaper. Why? Because airlines operating intrastate in California are not controlled by federal regulators.

In the field of energy, the Federal Power Commission, despite repeated warnings from experts, has been required for more than two decades to keep the wellhead price of natural gas at an abnormally low level in order to hold down prices for consumers. But this has reduced the incentives for the development of new domestic supplies, so that today there is less natural gas than we need. Government regulations have, in effect, created a national shortage.

Or take another example: nuclear power. This country was a pioneer in the development of nuclear power. Yet it takes 11 years to build a nuclear power plant in the United States, compared to only 4 to 4 1/2 years in Europe and Japan. Why? Because of excessive government red tape.

Nor has government ever had any greater success with wage and price controls. Controls have been tried again and again throughout history, all the way back to Roman times, and never once have they worked. But you don't have to consult your history to find the results of a centralized, controlled economy: just look around the world today at the nations whose governments run their economies, and ask yourselves whether you would be willing to exchange your American citizenship for a chance to live under their yoke.

Ladies and gentlemen, the modern economy may be difficult to understand at times. I am reminded of a comment by Baron Rothschild that he had only met two men in the whole world who really understood gold an obscure clerk in the Bank of France and one of the directors of the Bank of England. "Unfortunately," he added, "they disagree."

Nonetheless, I would suggest there is really no mystery about the way that we have dug ourselves into today's economic mess, nor is there any real doubt about the way to get out. Specifically:

As we lift ourselves out of this recession, we must restore greater discipline to our fiscal and monetary affairs. Neither man nor government can afford to live beyond its means. Governor Landon, it might be remembered, first won national fame by slashing government spending and balancing the Kansas budget. He set an example for us all.

Secondly, we must lift the deadening hand of government from the many areas of our economy such as energy where overzealous government regulations are now cramping our growth and our hopes for the future.

Thirdly, we must begin to rebuild the economic foundations of our free enterprise system by making a dramatic shift away from policies that encourage consumption and spending and toward policies that encourage much greater savings, investment and capital formation. This is one of the greatest challenges of the next decade.

Finally, we must awaken to the basic threat now posed to our liberties by the trend toward bigger and bigger government. This nation is still incredibly strong, solidly built on the foundation of personal and economic freedom, but we cannot long survive as a world leader if we continue to trade our freedoms to the Government in exchange for false promises of a better future.

In short, we must begin reordering our national priorities in a fundamentally different way. That is the best way, indeed, it is the only way, to provide a brighter future for all of the people of this country, rich and poor alike. And never forget that it is your future we are talking about today, the future that you and your children will inherit.

Your generation, the students on American campuses today, is the first generation in a quarter of a century to have gained freedom from compulsory military service. Yours is the first generation to have won the freedom to vote at the age of 18. Yours will be the first generation in which men and women can be treated equally, regardless of race or sex. All of these are great strides forward for this country progress in which all of us can take pride. But unless you stand up and fight for what is rightfully yours, you are also in danger of becoming the first generation to lose your fundamental economic freedoms, and if you lose your economic freedoms, I can guarantee that you will lose your personal freedoms as well. There could be no sadder end to the American dream.

An epitaph written for the ancient city of Athens and attributed to the pen of historian Edward Gibbon is still relevant for us today. "In the end," he wrote, "more than they wanted freedom, they wanted security. They wanted a comfortable life and they lost it all security, comfort and freedom. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free."

Whether the same will one day be said of America is the basic decision before us. It's really up to you and me to make sure this doesn't happen.

Thank You.

William E. Simon
Landon Lecture
March 18, 1975