Re: Fed vs White House

[mongiovg <mongiovg@xxxxxxxxxxx>]

I would be interested in hearing what Paul D. or Mat F. think about this.  I
assume that Laubach's results are grounded in orthodox macroeconomic thinking
about liquidity. As a Sraffian, I'm partial to the Kaldorian ideas that money
is endogenous and that the monetary authorities can set interest rates
independently of the market for saving & investment. I think Paul remarked a
few weeks back, that during the Second World War the US was able to sustain
huge deficits without high interest rates by adopting an easy-money policy.
That's intriguing. But are there no real-sector contraints on the monetary
authority's ability to keep interest rates as low as they wish to?

Gary


>===== Original Message From "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> =====
>Fed economist Thomas Laubach estimates in a recent paper that every
>additional $100 nillion increase in projected annual budget deficit adds
>one quarter percentage point to the yield on 10-year Treasury bonds.
>The Fed's traditional position is that budget deficits raise longterm
>interest rates, over which Fed monetary policy as currently constituted
>has little control.
>
>White House economists and tax cut advocates contends that the link
>between deficits and interest rates is loose and is negligent when
>compared with other economic forces.  Further, they contend that tax
>cuts by themselves do not necessarily produce deficits because tax cuts
>stimulate the economy and in turn increase tax revenue even with a lower
>tax rate.
>
>The Laubach estimate is 16 times that estimated by Bush's Council of
>Economic Advisors, as it was headed by Glenn Hubbard of Columbia, which
>came to 0.015 percentage point for each addition $100 billion.
>
>Based on the Laubach estimate, the Bush budget if passed as is ($300
>billion) would increase 10 year Tresuries by 0.5 to 0.6% in 2004.  The
>bond market has reacted accordingly.
>
>Laubach is a recognized inflation targeter, part of the Princton gang
>that includes Taylor of the Taylor Rule, Bernanke, the money printer of
>late.
>
>(Inflation Targeting: Lessons from the International Experience
>by Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, Adam S. Posen)
>
>According to the Financial Times, the administration?s estimate of a
>cumulative deficit for $1,048 billion for the five-year period 2004-2008
>was only achieved through a ?sleight of hand? carried out by offsetting
>surpluses set aside for Social Security payments against the ?massive
>future liabilities of the federal government.? If these surpluses are
>stripped out, the cumulative deficit in the next five years rises to
>$2,140 billion.
>
>That's $400 billion additional deficit a year, which will push 10 year
>Treasuries 1% higher each year for the next five years from its current
>4%.  Ten year rate could reach 9% in 2008.  Goodbye recovery.
>
>Henry C.K. Liu