If the economy then takes a dive, we are sure to hear a drumbeat of voices blaming the Federal deficit. Mr. Greenspan, it would seem, is prepared for this scenario. In November 1995 he warned: "If, for some unforeseen reason, the political process fails, and [a balanced budget] agreement is not reached, it would signal that the United States is not capable of putting its fiscal house in order, with serious, adverse consequences for financial markets and economic growth."

The political establishment can be expected to react to any bad economic news with renewed demands for more fiscal austerity since the consensus for a balanced budget wrongly assumes that high deficits are the sole cause of today's high interest rates.

But contrary to that view and Mr. Greenspan's assertions, the nation has been keeping its fiscal house in order, with the deficits declining over the past three years. The 1992 budget deficit of $290 billion was 4.9 percent of the gross domestic product; the 1995 fiscal year deficit of $164 billion is only 2.3 percent.

But this decline did not stop the Fed from raising interest rates six times in 1994. Real interest rates (adjusted for inflation) began to rise dramatically in the early 1980's (from less than 1 percent to about 5 percent on long-term government securities), not because of the deficits but because of the Fed's reliance on high interest rates as the sole anti-inflation policy.

But persistently high real rates have retarded investment and slowed economic growth. As a consequence, governments are now burdened by much larger "passive deficits" as they collect less in tax revenues and spend more on jobless compensation and enormous interest costs on their debts. By increasing debt service costs of the private sector as well as of Federal, state and local governments by hundreds of billions of dollars a year, higher interest rates constitute the most important and most hidden of the so-called unfunded Federal mandates.