Interest Rates and Fiscal Sustainability

Interest Rates

and

Fiscal Sustainability

Scott T. Fullwiler

Wartburg College

Prepared for the annual meetings of the Eastern Economics Association

Manhattan, NY

March 5, 

Purpose:

1.General principals for the inter-relationship of interest rates, government deficits/debt, and so-called “sustainability” of fiscal policy for a sovereign currency issuing government.

Others:

Wray (2003) in Forstater/Nell

Bibow (2004) Levy WP No. 400

Mitchell and Mosler (2005)  CofFEE WP No. 05-01

2.  Specific application to the “fiscal imbalance” literature

a.  “Fiscal Imbalance” of Gokhale and Smetters (2003)

b.  “Fiscal Gap” of Auerbach (1994, 1997, 2003)

c.  “Generational Accounting/Storm” of Kotlikoff (1992, 2004)

Kotlikoff and Sachs, The Boston Globe (5/19/03)

“Suppose the government could, today, get its hands on all the revenue it can expect to collect in the future, but had to use it, today, to pay off all its future expenditure commitments, including debt service net of any asset income.  Would the present value of the future revenues cover the present value of the future expenditures?”

“The answer is no, and the fiscal gap is $44 trillion.”

The Primary Tenets of Fiscal Sustainability from the

Orthodox/Fiscal Imbalance Perspective