Saving the Recovery

Congress IS still out, and during the recess it is reportedly soaking up grass-roots nervousness about real interest rates going up again (despite the drop in both Treasury bills and FHA mortgage rates since the lawmakers left town). So certain high-ranking Reagan officials fear that when Congress reconvenes, deficit phobia will reach hysteria proportions. The alleged connection between deficits and interest rates will be insisted on afresh, with the “crowding out” theory gaining in credibility—i.e., the belief that since the Treasury has to borrow some $200 billion to finance the national deficit, the government will be competing for this money with the private sector (insofar as that sector wants to borrow for capital investments), thus activating supply-and-demand dynamics and forcing up interest rates. The historical climb in interest rates during the ninth and tenth months of a recovery, plus the role of the Fed in producing the higher rates through its gentle tightening of the money supply—these components of the rise in interest rates will be conveniently ignored.

The chairman of the President’s Council of Economic Advisors, Professor Martin Feldstein, will give academic plausibility to this thinking. He declared flat-out last month before the Senate Banking Committee: “The fundamental reason for the high level of real interest rates is the widespread expectation of large budget deficits for the remainder of the decade.” Add to this the influence of people like Bob Dole, who want Mr. Reagan to hold an “economic summit” (code words for a gathering whose purpose is to decide how to raise taxes). In a word, since Congress refuses to cut spending, the cry will be to raise taxes, in order to shrink the deficit and “save the recovery.”

JM

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John McLaughlin

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Congress IS still out, and during the recess it is reportedly soaking up grass-roots nervousness about real interest rates going up again (despite the drop in both Treasury bills and FHA mortgage rates since the lawmakers left town). So certain high-ranking Reagan officials fear that when Congress reconvenes, deficit phobia will reach hysteria proportions. The alleged connection between deficits and interest rates will be insisted on afresh, with the “crowding out” theory gaining in credibility—i.e., the belief that since the Treasury has to borrow some $200 billion to finance the national deficit, the government will be competing for this money with the private sector (insofar as that sector wants to borrow for capital investments), thus activating supply-and-demand dynamics and forcing up interest rates. The historical climb in interest rates during the ninth and tenth months of a recovery, plus the role of the Fed in producing the higher rates through its gentle tightening of the money supply—these components of the rise in interest rates will be conveniently ignored.

The chairman of the President’s Council of Economic Advisors, Professor Martin Feldstein, will give academic plausibility to this thinking. He declared flat-out last month before the Senate Banking Committee: “The fundamental reason for the high level of real interest rates is the widespread expectation of large budget deficits for the remainder of the decade.” Add to this the influence of people like Bob Dole, who want Mr. Reagan to hold an “economic summit” (code words for a gathering whose purpose is to decide how to raise taxes). In a word, since Congress refuses to cut spending, the cry will be to raise taxes, in order to shrink the deficit and “save the recovery.”