A group of prominent economists from the United States, France, West Germany and Japan warned yesterday that continued high U.S. interest rates threaten the economic recovery both in this country and around the world.
The group, brought together under the auspices of the Brookings Institution over the weekend, said that lowering the large prospective federal budget deficits in the United States is the key to reducing long-term interest rates.
"We believe that a substantial reduction in future U.S. budget deficits, under measures enacted into law this year, would bring major benefits not only for the United States but for the entire world economy," the six economists said in a statement released by Brookings president Bruce MacLaury, who helped organize the session and participated in it.
The economists included two former chairmen of the Council of Economic Advisers, Charles Schultze and Alan Greenspan; former French prime minister Raymond Barre; former West German finance minister Manfred Lahnstein; Taroichi Yoshida, former Japanese vice minister of finance; and Bunroku Yoshino, former Japanese deputy foreign affairs minister.
With lower deficits in future years, the statement said, "long-term U.S. interest rates could be expected to decline and the Federal Reserve would be operating in an environment where it would have no reason to resist this decline. Not only would this reduction in U.S. interest rates help to sustain the recovery directly by encouraging private investment but, equally important, reduced interest rates would contribute to the restructuring of business balance sheets, a restructuring that we believe is essential if stable economic growth is to be sustained over the longer run."
Lower rates would allow easier financing of short-term debt by longer-term obligations, probably lead to further increases in the stock market, and "through their effect on the pattern of exchange rates, would improve U.S. competitiveness, and reduce pressures for trade restrictions," the statement said. In other words, lower rates should reduce the value of the dollar on foreign exchange markets, particularly relative to the Japanese yen.
A sustained recovery in the United States should also spill over into the economies of other countries, both industrial and developing. "An expansion of the world economy will lead to higher demand for less developed countries' exports, providing the only fundamental way of assuring the repayment of LDC debts," it added.
The group's statement, while urging that budget deficits be reduced in the United States in order to achieve lower interest rates here, took the opposite tack for Japan.