Split over U.S. economic policy

Press, 22 October 1983, Page 22

Split over U.S. economic policy

NZPA-Reuter Washington

The Federal Reserve Board chairman, Mr Paul Volcker, has challenged the prevailing Government view of economics by saying record Federal Budget deficits are keeping U.S. interest rates high. In testimony before the Congressional Joint Economic Committee, Mr Volcker made it clear he disagreed with the claim by the Treasury Secretary, Mr Donald Regan, that no link existed between interest rates and the size of the deficit.

“The current prospect that Federal Budget deficits will remain exceptionally large into the indefinite future is a major factor propping up interest rates,” Mr Volcker said.

Deficits continued to pose a serious risk to financial market stability and also threatened prospects for a sound, long-term economic recovery.

He has repeatedly expressed concern about the impact of budget deficits, but his latest comments have added significance because of a growing feud between Mr Regan and the White House’s Chief Economic Adviser, Mr Martin Feldstein, over the link between deficits and interest rates.

Mr Feldstein, who shares Mr Volcker’s belief that deficits are keeping interest rates high, has run into trouble at the White House for publicly disagreeing

with the Treasury Secretary. Mr Volcker also took issue with Mr Regan’s view that strong economic growth this year and next would substantially reduce

the size of future budget deficits. “It is an illusion to think this budget deficit problem will be handled by growth alone,” he said. The deficit would actually become worse if the economy grew more rapidly, he claimed. The Fed chief suggested a rapidly growing economy would mean stronger borrowing demands from business and consumers at the same time the Federal Government was borrowing heavily to finance the deficit.

Unless the Fed supplied enough money to meet all demands, ana thus risks a surge in inflation, Government borrowing “crowds out” private borrowers and interest rates rise, he said.