Where Bank Rates Fit Into the Stimulus vs. Fiscal Discipline Debate

The breaking of a filibuster yesterday paved the way for a further emergency extension of unemployment benefits. The debate over those benefits was the latest example of a larger debate concerning which of two major economic problems should get priority now: the faltering recovery, or the federal budget deficit.

Savings account rates, money market rates, and CD rates all have a direct stake in this. Fiscal stimulus, if successful, could hasten the return of more normal bank rates -- i.e., bank rates several percentage points above current levels. On the other hand, letting the deficit continue to soar out of control would have dire consequences to depositors in the form of inflation, fiscal instability, and a crippling of future economic policy.

Both sides of this argument have valid economic arguments. People in favor of stimulus believe that without reviving the economy, the government will never see the growth in tax receipts necessary to close the deficit. On the other hand, those concerned about the deficit point out that if America continues to borrow while much of the world is turning toward fiscal discipline, it may be tougher (i.e., more expensive) to get other nations to buy our debt instruments in the future.

While the debate on unemployment benefits shaped up largely as Democrats on the side of stimulus and Republicans on the side of discipline, the larger debate is less clear-cut than that. Many traditionally Republican business interests have championed the cause of further stimulus.

Further stimulus might help the immediate problem, but the economic policies of the past decade have largely been based on short-term solutions, and look where they have led us. Perhaps it is time to take a longer-term approach.

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