A Brief Exchange With Robert Reich (brief on his end at least...)

I occasionally read Robert Reich’s blog.  In case you are not familiar with him, he was Clinton's Secretary of Labor and is currently the Chancellor's Professor of Public Policy at the University of California at Berkeley.  He is also a frequent political commentator on television.

I sent him this email today:

Dear Mr. Reich,

I am an admirer of yours, particularly of your steadfast defense of the American worker.  However, I must point out a disagreement with a point you raised on your most recent blog entry.

“But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise."

Your most recent blog states that government deficits tend to raise interest rates.  I believe this to be false. Government deficit spending introduces new money, new reserves, into the banking sector. That means that banks have more reserves in the aggregate system to satisfy their reserve requirements. Deficit spending puts downward pressure on the overnight lending rate, because there are extra reserves in the system (since the government has spent more into the economy than it has taxed out of the economy), so the price of lending reserves goes down.

So the idea that the Treasury would have to raise rates on Treasuries because of a deficit would create the nonsensical situation where the interbank lending rate would be falling to zero (because of excess reserves from the deficit spending) and yet rates on Treasuries would be rising because those same banks are refusing to buy the Treasuries and receive a return.

Perhaps Japan is an instructive example.  Their debt-to-GDP ratio is way higher than ours, and they have received (meaningless) credit downgrades.  Yet their interest rates are nil.

Note that my point should give your interests (a fair environment for workers) even more leverage in the current discussion as it alleviates some of the unnecessary fears politicians try to use to encourage us to gut socials programs.

thanks for your time!   Steven Stark

And then I got an email back!  Only one sentence, but I was thrilled!  It read:

"I probably agree with you more than I disagree, but I wanted to make an argument that even mainstream economists could understand."

Interesting!