As our economy continues its rapid recovery from the pandemic and we are likely to achieve herd immunity by April, the Democratic Congress is on the verge of passing a $1.9 trillion Covid Relief Stimulus Bill.
This is a terrible idea for many reasons:
- It isn’t needed. Congress has already provided a total of $3.3 trillion in Covid Relief, or 16% of annual GDP. An extra $1.9 trillion would raise this to 24% of GDP, by far the highest in the world (see chart).
- The exploding national debt is an extremely serious problem, already predicted by the Congressional Budget Office to reach 202% of GDP by 2051 (double the current level). Carelessly throwing an additional $2 trillion more at the debt speeds up the time for when our next fiscal crisis hits, which will be a doozy.
- Right now our debt is almost “free” money because interest rates are so low. But we can’t assume that this will continue indefinitely. When interest rates do go up, then interest payments on the accumulated debt will increase dramatically, and this is when we’ll have our next fiscal crisis.
- When will interest rates go up? This will happen when inflation takes off, forcing the Federal Reserve to raise interest rates in order to slow down the economy which is the only way to stop inflation. This is exactly what happened in 1980 when inflation rose to 14% before dropping to 3.8% in 1982.
- A big increase in inflation is already very likely, which will be greatly exacerbated by an additional $2 trillion stimulus. Even liberal economists such as Larry Summers and Steven Rattner consider inflation to be a big risk. Some say that its signs are already present.
Conclusion. It is incredibly foolish for the Democrats, now in complete control of the White House and Congress, to act in such a fiscally irresponsible manner. National debt started edging up under President Reagan and has continued to increase with every President since, except under President Clinton who actually achieved a balanced budget for several years in a row (see chart). Since it will be rapid inflation that initiates the above-described damaging sequence of events, every President should be especially careful not to be the one kicking it off.
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It Does Not Add Up 
The other related issue is that the stimulus bill has a very large portion devoted to payola!
There are many bad individual parts of this bill. I try to stay out of the details of specific legislation and just consider their overall impact which in this case is awful!
While we may agree or disagree with the size of the stimulate legislation, again the progressives have taken a crisis and found a way to make it worse for the country by its staggering addition to the national debt as well as using the government’s budget to “buy” votes. While Nancy and Chuck gleefully repeat polling showing that the American taxpayer supports the legislation such support comes primarily from those who see a $1,400 handout.
It is also true that roughly 70% of the public think that deficits are too high. The “general public” can be quite inconsistent in how it polls on different and conflicting topics!
I think you’re overstating the affect of future interest rates on outstanding government debt. The only “variable rate” government notes I’m aware of are FRNs which only have a term of 2 years. TIPS and S1 bonds adjust the face value for inflation, but this does not meaningfully affect the interest payments. Most of the outstanding government debt is locked in at low interest rates and will not balloon when rates go up.
Arguably, this is the best time for the Government to be borrowing for a variety of reasons.
1) It is cheap to borrow because rates are so low.
2) Inflation has been persistently below the fed’s target, and as a result a defined period of above-target inflation is warranted so that the average is 2%. https://www.wsj.com/articles/is-inflation-a-risk-not-now-but-some-see-danger-ahead-11614614962
3) The country is not out of the woods yet, and more stimulus is needed to protect the livelihoods of people and businesses hurt by the pandemic.
It is not prudent to cut off spending during such uncertain times for the sake of avoiding an inflation problem which doesn’t exist. Inflation has been persistently low in spite of historic spending which points to the fact that the economy is still growing, and the new money injected via this debt is put to good use. Preemptively cutting down borrowing or hiking rates to avoid inflation may actually cause the same because it will be harder for the public sector to put money to work.
At the same time, if/when inflation does go up, the government will have to wean off large deficits which won’t be easy. Hopefully this transition wouldn’t have to be as abrupt as it was in the 80s.
Inflation should be avoided, but I advocate for an approach that focuses on keeping the economy growing with forward-thinking government spending and fiscal policy rather than defensive rate hikes and spending cuts. Succinctly, if there is too much money for the size of the economy, do we grow the economy or cut the money? I say grow the economy.
Most of our debt is financed by 10-year treasury bonds which are constantly rolling over and being refinanced at current bond interest rates. So, yes, higher interest rates caused by a jump in inflation won’t affect interest payments on the debt all at once, but will be phased in.
But, in the meantime, our debt is growing rapidly which means that interest payments on the accumulated debt will increase dramatically (over a period of time) when interest rates do increase. The $1,9 trillion Covid stimulus risks setting off inflation. Is this a smart risk to take when our economy is already recovering rapidly? I say no.
Biden, of course, could luck out with no big jump in inflation.