Cutting the Deficit May Not Be Solution to EconomyÛªs Problems
High interest rates are the stick that drove Congress and the White House to negotiate all spring over the budget and that may yet push Congress to take some action to reduce the upcoming deficit.</br></br>The theory is that lower prospective deficits will reduce pressure on the financial markets, reduce fear of future inflation, and for both reasons bring a reduction in interest rates that will let the economy off the floor of recession.</br></br>All sides agree that high interest rates are a leading cause of the economyÛªs problems. But there is lively disagreement about the rest of the equation: just what is keeping rates high now, and how best to bring them down without harming the economy in other ways.</br></br>President Reagan has himself been afflicted by this split in opinion. Thus he has said that the likely deficits over the next several years are keeping rates high, in part because they are raising inflationary expectations and leaving investors unwilling to lend except at extremely high rates. But he has also taken a contrary view and, citing cases in the Midwest where local banks have cut their rates, has argued that interest rates should come down because the inflation rate has come down so rquch in recent months.</br></br>There are several lines of argument against the interest rate theory on which the budget negotiators have been operating.