Government Spending

When Government Spending Hurts the Most Vulnerable

As inflation increases, we need a low-debt environment.

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A lot of people don't care about the nation's growing debt. Some believe that low interest rates for the foreseeable future essentially means a free lunch for the government. Others believe that no matter what the cost of this debt, it is all worth it because of the purported higher returns on government spending. But there is an argument that may convince them otherwise: If inflation ever gets out of control, it's easier to deal with it in a lower-debt environment.

I believe that high levels of debt are problematic. First, growing debt means growing spending, along with government expanding in size and scope. I like my government small and as unintrusive as possible, so I am not happy about the current spending situation. Second, a review of the literature about the impact of government spending on growth reveals that, generally, such spending crowds out the private sector. This dispels the hope that more spending will produce economic wonders.

Deficit spending will eventually result in higher taxes for future generations. That's a profoundly unfair burden. Debt is also expansive in and of itself, as interest payments on an enormous amount of debt—even when interest rates are low—will result in a larger and expanding deficit. According to Brian Riedl at the Manhattan Institute, Congressional Budget Office data reveal that by 2049, "Interest payments on the national debt would be the federal government's largest annual expenditure, consuming 42% of all projected tax revenues."

Eventually, growing debt will also slow economic growth. Lower growth means fewer innovations, lower wage growth, and higher unemployment. It's all-around bad news. Finally, higher debt could result in a debt crisis. These are good enough reasons for me to want to restrict the size of government and impose fiscal prudence.

Interestingly, recent concerns over inflation have highlighted one additional reason why higher debt is problematic. You see, when it comes to inflation, people's expectations about the price trajectory in the next few years are what really matters. So, it matters less than we think that the current inflationary forces are likely transitory. If people believe that inflation is here to stay, they will try to protect themselves from it today, and we will indeed have inflation today.

Under that scenario, to get inflation under control, the Federal Reserve will have to raise interest rates. And this is where your debt levels matter. Higher interest rates result in a large increase in overall interest payments fairly quickly, as so much of our debt needs to be rolled over on a short-term basis. A sudden increase in interest rates would slow down the recovery, too, which hurts lower-income Americans.

If the Fed were immune to political pressures, this reality might not matter. However, we can expect that political pressure to be enormous. No administration would be happy to see a large increase in interest payments suddenly show up on its balance sheet followed by a large increase in the size of the deficit, especially if that administration is already planning to spend a larger amount of money in the first place. This pressure only grows under an administration that will resist any rate change that could hurt growth. The Fed may also be slow to act because it has made addressing inequality one of its priorities.

The good news, some people believe, is that the market doesn't seem to believe that inflation will stick around much longer. If the market did believe that, then the indexes that measure expected inflation would reflect their worries and interest rates would increase. However, expected inflation measures change fast, and historically, the market has had a terrible track record at predicting inflation. It's very unpredictable precisely because it's so conditional on expectations. In other words, I wouldn't take much comfort from that talking point.

Do I know what expectations are and how long inflation will stick around? I don't. But in truth, no one really does. That's part of the point. In that context, fiscal prudence now is the best course of action, because with so much political pressure in the worst-case scenario, there will be fewer opportunities when the Fed must actually raise interest rates.

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  1. SleepyJoe will use his quick wits and powerful intellect to solve this problem .
    Day One!

    1. GoogIe ahora paga entre 17488 y 24900 dólares al mes por trabajar en línea desde casa. Me incorporé a este trabaj0 hace 2 meses y he ganado $ 27540 sdv en mi primer mes de este trabajo. Puedo decir que mi vida ha cambiad0, ¡compIetamente para mejor! Mira lo que hago.>>>> READ MORE

      1. GoogIe ahora paga entre 17488 y 24900 dólares al mes por trabajar en línea desde casa. Me incorporé a este trabaj0 hace 2 meses y he ganad0 $ 27540 sdv en mi primer mes de este trabajo. Puedo decir que SDXDA mi vida ha cambiad0, ¡compIetamente para mejor! Mira lo que hago.>>>> VISIT HERE

      2. GoogIe ahora paga entre 17488 y 24900 dólares al mes por trabajar en línea desde casa. Me incorporé a este trabaj0 hace 2 meses y he ganadD0 $ 27540 sdv en mi primer mes de este trabajo. Puedo decir que SDXDA mi vida ha cambiad0, ¡compIetamente para mejor! Mira lo que hago.>>>> VISIT HERE

  2. Just went to the grocery store this morning and noted prices up on most things – except my favorite mayonnaise. Then I noticed my favorite mayonnaise now comes in a thirty ounce quart. A quick 6.5% price increase disguised as no price increase at all.

    1. The liter of that company decided must have opint that reducing the size but retaining the same price would increase profits. Some might claim that thus person doesn’t have an ounce of scruples.

      1. It dozen’t matter, I’d still like to pound him on the head.

    2. “The liter of that company decided must have opint that reducing the size but retaining the same price would increase profits. Some might claim that thus person doesn’t have an ounce of scruples.”

      “It dozen’t matter, I’d still like to pound him on the head.”

      I will offer my services to help meter out the proper punishment.

    3. Buying steaks last night, filets are up to $40/lb, ribeyes are $27, and strips are $19.

      Last year this time they were $25, $15, and $12

    4. The family sized cereal box of today is the individual serving size from 20 years ago.

      I refuse to buy any product that doesn’t come in 8 or 16 oz. Fuck these assholes and their 15.3 oz bag.

    5. Ah yes, I remember the 1970s. Good times, good times.

      When a fifth became 750ml– conversion to the metric system, don’t you know– with the purely coincidental size shrinkage.

      Pretty soon we’ll all be bitching about petroleum daisy chains and needing to cut out the nefarious middleman!

      1. Yes…but a fifth of a gallon is 0.757 liters, so that change was minor compared to the ones since then. Only a 0.9% reduction.

  3. I saw Uncle Joe say that Moodys and Summers were all in on high inflation and lots of debt. Interviewed by a Lemon so you know it’s accurate. Krugman approved.

  4. Government spending always makes the rich richer. Redistribution always benefits the politically powerful more than it benefits the politically weak.

    1. Preach it, brother.

  5. Vox assured me today that inflation is nothing to worry about because this time it’s different for reasons.

  6. I believe that high levels of debt are problematic.

    Wow, such a profound insight from a highly qualified expert and deep thinker! /sarc

  7. Well Reason is waking up. Yet not one mention of Joe Biden and the Democrats spending, just “government spending”. Well it is Joe Biden and the Socialist Democrats spending us to destruction, make no doubt about it.
    Yes inflation does hurt the poor and those on fixed income like the elderly the most. Wages will lag, but will go up. Saving will only go down, and Social Security follows the fake consumer price index that does NOT include FOOD or FUEL.
    You know who this insane spending helps the most? Those deeply in dept, like US corporations leverage to the hilt. They pay down their debt with cheaper and cheaper dollar. So much for the Socialist being for the little people!

  8. From the Article —
    Under that scenario, to get inflation under control, the Federal Reserve will have to
    If the Fed were immune to political pressures, this reality might not matter.
    The Fed may also be slow to act because it has made addressing inequality one of its priorities.
    there will be fewer opportunities when the Fed must actually raise interest rates.

    The *real* problem was passed right before the Great Depression in 1913 pitched by Democrats called “The Federal Reserve Act”. The Federal Reserve Act put the ‘Fed’ in charge of USD and the People of the USA Labor for USD.

    The Act essentially put *all* the USA People’s Labor under the ‘Feds’ manipulation …. because YOU don’t own you; [WE] own you has the the party-of-slavery’s slogan ever since it began.

  9. Hmm, as inflation increases it would seem to me that taking on even more personal debt is the way to go.

    If inflation increases fast enough I can pay off my house early.

    1. ‘Fiat’ games. Interest only FHA loans = The Recession of 2008.
      And all those job-loses and house-loses equity goes straight to the “fiat” game planners.

      Just another way to *steal*.

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