Biden Has to Learn the Same Lesson as SVB

In hindsight, it was obvious it wouldn’t last. Low interest rates — the result of shifts in the global economy, economic stability, low inflation and monetary policy — couldn’t stay at zero forever. But many people behaved like they would even after inflation returned. And it wasn’t just management at Silicon Valley Bank and bank regulators who were unprepared for rising rates. Perhaps the worst offender was, and still is, the federal government.

The US government has been borrowing and spending as if rates would be low forever, continuing even through 2021 and 2022. And it’s still counting on low rates, if President Joe Biden’s latest $6.9 trillion budget is any indication.

It was less conspicuous consumption before the pandemic when many people, policymakers and economists, argued that we could count on low rates for the foreseeable future. Some thought rates would stay low even if we spent a lot and the Federal Reserve kept printing money, behavior that historically resulted in high inflation and high interest rates. The fact that loose monetary and fiscal policy didn’t produce high rates and inflation after the 2008 financial crisis added to the perception that there would be no limit on how much policymakers could spend or cut taxes.

But this made no better sense for the US government than it did for Silicon Valley Bank. Years of data, and the experience of every country that’s not Japan, tell us that interest rates can always change. And when they do change it happens fast. In retrospect, there was probably some self-serving reasoning going on to justify everyone’s favorite policy, whether it was more spending or lower taxes.

So much so that when inflation picked up and rates started to increase, the scope of government didn’t change. In fact, it grew. The Biden administration released plans for expanding middle and upper-middle class benefits: student debt forgiveness and generous income payment plans going forward, child tax credits even for higher earners, and expensive industrial policy that seems geared more to social goals and well-paid jobs than economic growth.