Rising US debt has caused growing concern on Wall Street, but economist Paul Krugman isn’t worried and says you shouldn’t be either.
IN The newspaper “New York Times In his paper Thursday, the Nobel laureate wrote that while $34 trillion is a record, the debt as a share of GDP is roughly on par with levels seen at the end of World War II and well below Japan’s current debt burden as well as Britain’s post-war level. , neither caused the debt crisis.
Most historical examples of debt crises have occurred in countries that borrowed in another country’s currency, he added.
Of course, the debt has been growing for decades. But those concerned about U.S. debt levels today note that while they rose during the pandemic emergency as the federal government sought to prop up the economy, the debt has continued to accumulate without a comparable emergency, let alone a global catastrophe on the scale of the world. economy. Second war.
Meanwhile, the trajectory of the deficit and debt over the coming decades is more frightening for investors and policymakers than current levels.
Krugman noted that, unlike individuals, governments do not have to pay off all of their debt.
“How did we pay off the World War II debt? We didn’t do this,” he wrote. “The federal debt when John F. Kennedy took office was slightly higher than it was in 1946.” But debt as a percentage of GDP has fallen significantly due to economic growth and inflation.”
How to fix US debt
The key is stabilizing the debt’s share of GDP, not paying it off entirely, and Krugman highlighted recent research from the left. Center for American Progress To achieve this goal, it is estimated that the US would need to raise taxes or cut spending by 2.1% of GDP.
“That’s not a big number!” he added.
The tax revenue the U.S. government collects as a share of GDP is smaller than what other rich countries collect, and increasing it enough to stabilize the debt is unlikely to hurt economic growth, Krugman said.
Because the economics of debt stabilization are relatively simple, the main obstacle is politics, he explained.
“Given the political will, we could solve the debt problems quite easily,” he wrote. “To the extent that debt is a problem, it is a reflection of political dysfunction, mainly the radicalization of the Republican Party. This radicalization deeply concerns me for several reasons, starting with the fate of democracy, and the federal debt is nowhere near the top of the list. “
The worsening US debt and deficit situation is raising more alarm bells, and the US presidential election has raised the stakes.
Last month, “bond czar” Bill Gross warned that Donald Trump would worsen the deficit and be “more destructive” to the bond market than Joe Biden.
BlackRock CEO Larry Fink sounded the alarm on Wall Street in March, joining JPMorgan CEO Jamie Dimon and Bank of America CEO Brian Moynihan. And in April, Citadel’s Ken Griffin said the US was being “irresponsible” with its public debt.
Even Treasury Secretary Janet Yellen acknowledged in May that the prospect of higher rates over the long term would make it more difficult to control deficits and debt spending.