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Government Spending

Our Insane Government Spending Will Hurt Our Response to Ukraine

We must face the reality that the debt does matter.

Veronique de Rugy | 3.3.2022 6:12 PM

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( CHINE NOUVELLE/SIPA/Newscom)

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 such, the government can carry high debt levels without worrying about debt sustainability, especially if the higher debt is used by government for sensible and productive investments.

In addition to the folly of counting on interest rates to stay low indefinitely, this first scenario requires immense faith in legislators' willingness to spend money in ways that produce high and consistent economic growth. A review of the academic literature reveals that such spending typically crowds out healthy private-sector spending.

The second and more interesting scenario argues that in countries where real interest rates are lower than the real rate of economic growth, a one-time deficit increase—even a large one—won't have any cost over time. It's a new twist on the old idea that under the right conditions, economic growth can outpace debt. Suppose the Treasury borrows $3 trillion to finance the next Build Back Better plan. If all Congress does is allow the Treasury to borrow new money to pay interest on the debt—and as long as interest rates stay below the rate of GDP—then debt will grow, but the ratio of debt to GDP (a key metric reflecting our ability to absorb the borrowing) will fall slowly.

Unfortunately, as appealing as this scenario sounds, it's not in the cards for our country. My Mercatus Center colleague Jack Salmon and I explain in a new study why that is. This scenario only works with a one-time deficit increase followed by decades of taxes large enough to pay for our spending. What economists call the "primary deficit" (the difference between the current fiscal deficit and interest payments on previous borrowings) needs to be balanced for years.

This condition is a must if we wish growth to outpace interest payments, and it's nowhere to be seen in today's and future U.S budgets. A quick look at Congressional Budget Office analysis reveals decades of large primary deficits and growing debt-to-GDP ratios, mostly driven by the explosion in spending on programs like Social Security and Medicare. This outlook would get much worse if the next round of emergency spending comes without a real repayment plan.

Politically, of course, there's a lot of blame to go around. Politicians of all stripes long ago stopped caring about ballooning spending and growing indebtedness. It was particularly enlightening to see Republicans give up all past pretenses to care the moment former President Donald Trump announced he wouldn't touch Social Security and Medicare.

Yet even in a turbulent time, we must face the reality that the debt does matter. As the Hoover Institution's John Cochrane noted recently, big borrowing has to be followed by big consequences like big spending cuts, big tax increases, big inflation, or worse, a big debt crisis. It will also be followed by greater difficulty in responding to emergencies like the one in Ukraine.

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Veronique de Rugy is a contributing editor at Reason. She is a senior research fellow at the Mercatus Center at George Mason University.

Government SpendingInflationUkraineRussiaCoronavirusFederal ReserveDeficitsCongressEconomicsTreasuryGDPTaxesSocial SecurityMedicareDonald Trump
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  1. VULGAR MADMAN   3 years ago

    No one will reduce the debt, ever.

    1. Wearenotperfect   3 years ago

      Yep, you are correct. Thanks Trump!

      1. VULGAR MADMAN   3 years ago

        Trump is the new Hoover, except for that improving the economy thing.
        I quibble though.

        1. Palin's Buttplug   3 years ago

          Trump had the worst GDP record of any president since Hoover.

          1. VULGAR MADMAN   3 years ago

            How’s that child porn habit going?

          2. Sevo   3 years ago

            turd lies; it's all turd ever does. turd lies.

      2. TJJ2000   3 years ago

        Predictable; A lefty government blaming all their utter failures on the last government while forgetting it was they themselves that instigated and pushed for those utter failures and even still it is they themselves in government STILL doing it.

        "I'm innocent" --- Will be written on every single one of their head stones long after the concentration camps have come and gone.

  2. Longtobefree   3 years ago

    So defund -
    CDC
    FDA
    NIH
    Dept. of Education
    Dept. of Labor
    Dept. of Commerce
    Dept. of Interior
    Dept. of Agriculture
    Dept. of Energy
    Dept. of Transportation
    HHS
    HUD
    DHS

    Problem solved.

    1. VULGAR MADMAN   3 years ago

      CIA
      FBI
      NSA
      ATF
      DEA

      1. TJJ2000   3 years ago

        Humorously a reporter actually went through all members of the USA Congress and asked them "How Many" agencies the US Government had?

        Answer; Out of the 500+ Congressmen not a SINGLE ONE knew for sure.

      2. burserker   3 years ago

        +100

  3. Nardz   3 years ago

    Hi Ken!

    https://moderndiplomacy.eu/2018/06/04/how-and-why-the-u-s-government-perpetrated-the-2014-coup-in-ukraine/

  4. Nardz   3 years ago

    I've watched for approximately 45 seconds. Didn't see anything but some car alarms going off, but who knows what might happen

    https://twitter.com/Conflicts/status/1499535100005990404?t=wNPNN7CAa2mweXIg3AH3mw&s=19

    UKRAINE: Heavy fighting is underway tonight at Europe's largest nuclear power plant in the city of Energodar. A CCTV camera broadcasting from the plant is showing some of the fighting.
    [Link]

    1. Nardz   3 years ago

      Maybe something was going on there earlier?

      https://twitter.com/bogdirt/status/1499534114478641168?t=sUC52maTmZ5VRfYDwa_bqg&s=19

      Yea, watching a stream of a battle in the parking lot of a nuclear power plant wasn't something I was expecting to be doing this year, but here we are.

    2. DefineReasonable   3 years ago

      Fireworks from a roadside tent make bigger explosions.
      Coincidentally, one of the areas MSM keep showing videos from actually has a tent set up that looks just like one.
      I have yet to see one video that matches up with all of the hype behind it. There have been a lot of fake ones too. Hannity aired one last week of a supposed injured child being brought to the hospital via ambulance. Anyone with a basic background in medicine could tell you it was not real if the bad acting wasn’t enough to tip you off.

  5. Nardz   3 years ago

    https://www.washingtonpost.com/world/2022/03/03/russia-cat-ban-ukraine-war/

    "No cat belonging to exhibitors living in Russia may be entered at any FIFe show outside Russia, regardless of which organization these exhibitors hold their membership in,” said the organization, which spans almost 40 countries.

    1. VULGAR MADMAN   3 years ago

      That form of retardation is nothing new,
      sadly.

      1. Nardz   3 years ago

        Yea, but it's reaching new heights now

        1. VULGAR MADMAN   3 years ago

          At least they aren’t killing the cats.
          So far.

  6. Nardz   3 years ago

    If Zelenskyyyyyyyyyyyyyyyy were legit, he'd challenge Putin to single combat to decide the war, just like the old days.

    1. VULGAR MADMAN   3 years ago

      You aren’t helping.

      1. Nardz   3 years ago

        It's true. Would never happen, but would be good optics.

    2. perlhaqr   3 years ago

      I can supply a Thunderdome!

  7. Palin's Buttplug   3 years ago

    So FY 2022 is forecast for a deficit of $1.4 trillion?

    That means Biden already has his trillion dollar deficit cut on the way. The one he boasted about in the SOTU.

    Well, Donnie-Boy did say he is the King of Debt.

    1. VULGAR MADMAN   3 years ago

      Stop molesting children.

  8. Nardz   3 years ago

    Well, Canada's taking hostages now.
    ...for freedom!

    https://twitter.com/OmarAlghabra/status/1499472158996803585?t=PvlTe_bi2Rmm6P_xB22G1Q&s=19

    A charter aircraft that carried Russian foreign nationals has been held at the Yellowknife airport. We will continue to hold Russia accountable for its invasion of Ukraine.

    1. Super Scary   3 years ago

      It feels like we're a few steps away from internment camps. You know, for their "safety."

  9. Ken Shultz   3 years ago

    The Russians shelled a nuclear power plant. There's a fire. The International Atomic Energy Agency is demanding an immediate ceasefire so that the nuclear plant can be secured.

    I don't think the Russians were shelling a nuclear power plant by accident. I don't even think the Russia army is that incompetent. An action like that probably requires evil intent.

    1. Brian   3 years ago

      Russians hate nuclear power.

    2. Nardz   3 years ago

      LOL
      I hope you recover, Ken, because you're currently as broken as sarcasmic.

      1. Ken Shultz   3 years ago

        "I hope you recover, Ken, because you're currently as broken as sarcasmic."

        I'm broken because the Russians shelled a nuclear reactor?

        How does that make sense?

        1. spiggot   3 years ago

          You're broken because you take CNN "news" at face value. Do you have a flicker of awareness of the fact that there were zero (that's right, *zero*) neutral observers at the scene? In reality, that means we can, at best, make weak guesses about what's really happening.

        2. Nardz   3 years ago

          https://twitter.com/greg_price11/status/1499805168505917444?t=ES2tXxTFTe5PUl0fMzPiVQ&s=19

          Zelensky and the Ukrainian government essentially just lied about an imminent meltdown at a nuclear power plant (the fire was at a training building next door) in order to call for NATO to set up a no fly zone and draw the west into war.

  10. Nardz   3 years ago

    Miss Lyndsey Graham just called for Putin's assassination. He's a US senator.

    1. MT-Man   3 years ago

      can we ask for the brussel sprout in office to be cooked?

    2. Ken Shultz   3 years ago

      I hope Putin dies in a coup, which is tantamount to assassination.

      Short of that, I hope Putin is overthrown in a revolution and executed by his own people.

      What's wrong with that?

      I'm glad we assassinated bin Laden, aren't you? I'm glad he's dead. Aren't you? Calling for someone else to assassinate him would have been far shorter than that.

      I suppose going from being an apologist for Kremlin propaganda to apologizing of Putin personally is natural progression for a useful idiot like you, Nardz. But you should take down your American flags and put up some Russian flags instead--so your neighbors know who they're dealing with.

      1. Nardz   3 years ago

        "I don't think a US senator should be publicly calling for the assassination of another country's head of state."

        "I AGREE WITH LINDSEY GRAHAM AND YOURE JUST A USEFUL IDIOT!!!"

  11. Nardz   3 years ago

    https://twitter.com/Todd4NY24/status/1499443291066150920?t=jfz1_Jbf0BQPQ7Fjkmtknw&s=19

    It’s starting to look like Putin had a plan that was based on geographic, demographic, and economic realities and was not acting like a madman trying to conquer Europe.
    [Link]

    1. Ken Shultz   3 years ago

      It looks like Nardz is rooting for Putin.

      1. Ken Shultz   3 years ago

        You don't think of yourself as a libertarian, do you Nardz?

        1. Nardz   3 years ago

          I think you've been making a lot of proclamations about how the war is going, and you look like a fucking moron.

  12. Earth-based Human Skeptic   3 years ago

    Get woke!

    Debt does not matter. Spending is just the process of getting what you wish for. Nobody has to work--or work is just what you want to do. Stuff just shows up. And if anything does not fit our dream, we can fix it by public protest or government mandate.

    1. TJJ2000   3 years ago

      +10000; perfect sarcasm 🙂

  13. From Ohio   3 years ago

    Yep - but duh! But it doesn't make any difference, we are where we are and we need to do what we need to do.

  14. atisang   3 years ago

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    https://atisang.com/

  15. atisang   3 years ago

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    https://atisang.com/
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  16. atisang   3 years ago

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    https://atisang.com/
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  17. atisang   3 years ago

    https://atisang.com/%D8%B3%D9%86%DA%AF-%D9%85%D8%B1%D9%85%D8%B1%DB%8C%D8%AA/
    https://atisang.com/
    ati sang ara

  18. atisang   3 years ago

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    https://atisang.com/
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  19. atisang   3 years ago

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    https://atisang.com/
    atistone

  20. atisang   3 years ago

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  21. atisang   3 years ago

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    https://atisang.com/
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  22. atisang   3 years ago

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  23. atisang   3 years ago

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  24. atisang   3 years ago

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  25. tomcoulby   3 years ago

    I don't think that the Fed "failed to see inflation coming", since they started aggressively buying TIPS at the start of the COVID crisis. Everything is exactly as the Fed wants it to be...

  26. VULGAR MADMAN   3 years ago

    US implodes, Ukrainians hardest hit.

  27. Nardz   3 years ago

    Ukrainians fired RPGs from the plant, or so I've read.

  28. Nardz   3 years ago

    https://twitter.com/TheLastRefuge2/status/1499611532430168066?t=s8AnY9xLTocC69tpt4Olig&s=19

    Video clearly shows #Ukraine army firing RPGs from inside the power plant compound. This tells me all I need to know about the propaganda effort of Zelenskyy and his crew.

    NATO is trying to bait us, the public, into supporting war with Russia to protect their Ukraine grift.

  29. Nardz   3 years ago

    Sorry, Ken, it looks like you might be spreading propaganda... again.

    https://twitter.com/ClintEhrlich/status/1499589355513417733?t=AUA43k7MYTrqrFtxF4TsZA&s=19

    This is video of what appears to be an RPG being fired from inside the #Zaporizhzhya plant.

    Russian forces claim these RPG attacks are what forced them to return fire.

    Their explanation seems plausible from the video.

    [Video]

  30. Nardz   3 years ago

    https://twitter.com/YossiGestetner/status/1499569638513987584?t=Tewu6RUoLZ7Z8bAkr_S77g&s=19

    7:34; Ukraine FM: "Russian army is firing from all sides upon Zaporizhzhia NPP," as if there is a sustained attack on a nuclear reactor!

    7:47; AP in name of Ukraine: "elevated levels of uranium are being detected."

    8:20: A fire at an admin building in the complex.

    Oh.

    [Link]

  31. Nardz   3 years ago

    @YossiGestetner
    Here is an immediate example why amplifying Ukraine's rhetoric without checking is dangerous.

    Ukraine pushed out 2.5 hours ago that Putin is shelling a nuclear power plant/radiation levels rising. Went viral. A US Senator all worked up calls for a country's leader assassination.
    [Link]

  32. Nardz   3 years ago

    Almost everything the Ukraine government has put out turns out to be mistaken or a bald lie.
    Yet here even we have posters repeating it as sacred truth to arouse emotions.
    Stop believing everything that comes from people who constantly lie to you seems like sound life advice.

  33. Ken Shultz   3 years ago

    "Almost everything the Ukraine government has put out turns out to be mistaken or a bald lie."

    List two of them Nardz, or you're a liar.

  34. Nardz   3 years ago

    "List two of them Nardz, or you're a liar."

    Snake Island's 13 "martyrs"
    Babyn Yar monument damage

  35. Earth-based Human Skeptic   3 years ago

    Or collectively, for a political party.

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