Federal Deficits Shouldnt Hurt Corporate Borrowing
KALAMAZOO — Will the upcoming federal deficits lessen the money supply, choke off business borrowing, bump up interest rates and prolong the recession?
George Erickcek doesn’t think so.
Erickcek, an economist with the Upjohn Institute for Employment Research, noted that the economy grew during the 1980s when the country ran large budget deficits as the Reagan administration spent heavily on the military.
But he also pointed out that the economy grew even stronger during the 1990s when the nation had its first budget surpluses in 30-some years.
A few weeks ago, President George W. Bush unveiled his $2.13 trillion spending plan for fiscal 2003, a budget that has the government paying out $106 billion more than it proposes to take in next year.
“Theoretically it’s possible that government spending and federal deficits would crowd out private investment, but there is very weak evidence showing that that has occurred in the past,” said Erickcek.
More important than having a deficit, Erickcek felt, was the size of the shortfall in relation to the Gross Domestic Product (GDP). If the federal shortage was five percent or more of that measure, then he felt the money supply could be tighter and companies could find borrowing tougher. But Erickcek said Bush’s deficit is somewhere between one and two percent of the GDP.
“It’s going to be very small relative to the GDP. So it’s something that I think we can easily handle,” he said.
“Since we are in a recession, government deficits are traditionally what is called for to try to create a greater stimulus to the economy,” he added. “So my feelings are to stabilize the national economy, it’s prudent to run deficits during bad times, as well as run surpluses during good times.”
Erickcek didn’t think that the deficit would affect interest rates very much, either. In fact, what was of more interest to him was the wide gap that exists between the 10-year Treasury note and the federal funds rate. The 10-year Treasury was at 4.9 percent last week and the funds rate was 1.74 percent.
“I think there are a lot of current factors going on in terms of why the current spread between long-term rates and short-term rates are so large. I don’t think it’s because of fear of deficit spending by the federal government. I could be wrong, but I don’t think that’s the fear,” he said.
“In fact, the good news, and I think one of the strongest pieces of news in the national economy, is that interest rate spread between 10-year Treasury bonds and the federal funds rate.
“If you track that over the last 20 years, it highly suggests that we’re going to be coming to an expansion very quickly,” he added. “The spread right now that we’re seeing would be suggestive to say that we’re coming out of this recession.”
Much of the president’s spending increases are for the military and national security in the wake of the terrorist attacks.
Although the extra money will impact the economy, Bush is not touting his budget as an economic stimulus package. Nor is anyone else.
Erickcek felt that the best the government can do to stimulate the economy is to spend on infrastructure items. He said things such as highways, airports, better broadband service and sewer systems have a positive impact on productivity.
“These grease the market system and grease communications, make things more efficient and support the private sector,” said Erickcek.
“It probably would have a bigger impact than military spending.”