WE WISH to enter the competition for the 1983 Regan Prize. In the expansive tropical atmosphere of Manila a few days ago, Treasury Secretary Donald Regan said he would "offer a prize to anyone who can show me the connection between high rates of interest and high deficits." It is only a figment of Wall Street's fevered imagination, he suggested. "I can show you nations that have high deficits and high rates of interest and I can show you nations with high deficits and low rates of interest."
There are, in fact, two connections between deficits and interest. The direct one is through savings. Both the federal deficit and private investment have to be financed out of those savings. "When the federal government must compete with private borrowers for savings, real interest rates are bid up, discouraging investment." That line can be found on page 86 of last February's report of President Reagan's Council of Economic Advisers. It's a good report, and we can recommend it to Secretary Regan.
Incidentally, the administration's 1981 tax cut was supposed to raise the savings rate. But that has not happened, a matter of some sensitivity at the Treasury.
There's also an indirect connection between deficits and interest rates. In the United States, large deficits have usually meant high inflation ahead. American lenders have learned to keep interest rates up in times of growing deficits to protect themselves.
But in Japan and Germany, long-term interest rates are hardly more than half as high as they are here. Secretary Regan is quite right in saying that some countries can accommodate large deficits without pushing up interest. Why?
The thrifty Japanese have a phenomenally high savings rate. It's more than enough to finance the very large Japanese budget deficit and private investment as well. The German savings rate is not quite so remarkable, although it's well above the low American rate. But Japan and particularly Germany have also demonstrated that they can keep their inflation levels down. That leads you to a general rule: countries with high savings and good records on inflation can finance large deficits without an impact on interest rates. But countries with low savings and mediocre records on inflation--i.e., the United States--cannot.
It would be much more convenient for administration officials if the connection between deficits and interest were in doubt. Then they could merely blame the interest rates on the banks, or speculators, or whatever. But the connection exists and it is unbreakable--although that observation probably won't win us any prizes from Mr. Regan.