Our Insane Government Spending Will Hurt Our Response To Ukraine

The tragic events of the past week highlight the wisdom in maintaining a fiscally sound house, rather than a highly indebted government, before emergencies strike. Russia’s barbaric invasion of Ukraine and the West’s response will likely drive inflation even higher. At home, expect calls for more government spending to help Ukrainians defend themselves and enable us Americans to better deal with supply chain disruptions. No matter what lawmakers decide, they’ll be hindered in one way or another by past fiscal mistakes.

The United States finds itself with an inflation rate not seen since the early 1980s, thanks to too much COVID-19 relief spending and significant Federal Reserve accommodation piled onto already outsized deficits. As a result, government debt has now reached 100 percent of gross domestic product, and our fiscal year 2022 deficit will be $1.4 trillion. If Congress’ lack of interest in repaying any of it isn’t worrisome enough, our high debt will make controlling inflation more difficult. Any increase in interest rates by the Fed will translate quickly into higher government interest payments and more deficit spending.

Even if we ignore the Fed’s failure to see inflation coming, let’s at least dispense with the trendy idea that debt can be increased without damaging the government’s fiscal sustainability. Indeed, for years now, academics have floated several scenarios under which increasing the debt doesn’t threaten our fiscal health. The most reasonable take two main forms.

The first is based on the idea that real interest rates are historically low and forecast to stay that way for a long time. As