Re: fiscal deficit

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

February 8, 2000
LS-390
TESTIMONY BEFORE THE SENATE FINANCE COMMITTEE
TREASURY SECRETARY LAWRENCE H. SUMMERS

Debt reduction also creates fiscal space, widening the range of choices available to us, and giving us
greater capacity to respond to unforeseen problems. Today, the Federal Government is spending more
than $200 billion a year on interest payments that would be eliminated under our proposals. The President
proposes that resources not paid in interest be used to help ease the burden of the Social Security and
Medicare costs that will arise once the baby-boom generation begins to retire.

http://www.treas.gov/press/releases/ps390.htm

Kazuhiro Kurose wrote:

> Hi Sean
>
> > "Because money supply is endogenous,therefore, "crowding out" can't arise."
> >
> > Theoretically, correct, however what I have seen happen in the real world
> > this is not the case.  There is a so-called crowding out that takes place,
> > but businesses call it a credit crunch.  So, in practice, I am not so sure
> > that I agree with the theory.
>
> I think that "crowding out" is essentially different from "credit crunch". The former means that a high level of
> interest rate because of fiscal deficit restrains the amount of private investment. According to my understanding, the
> latter means that banks are reluctant to lend because of, for example, bad balance sheet. Therefore, the former is
> related to the price, interest rate, and the latter is related to the quantity rather than the price. Is this trivial
> difference??
>
>  **************************************
>   Kazuhiro Kurose
>   Graduate School of Economics and Business
>   Administration, Hokkaido University
>   Kita 9 Nishi 7, Kita-Ku, Sapporo, Japan
>   060-0809
>     TEL: +81-11-716-2111 ex:2786
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