Rising U.S. debt has raised concerns on Wall Street, but economist Paul Krugman isn’t worried and says you shouldn’t be either.
In a New York Times On Thursday, the Nobel laureate wrote that while $34 trillion is a record, debt as a percentage of GDP is roughly equivalent to levels at the end of World War II and well below Japan’s current debt burden and Britain’s post-war levels . , neither of which led to a debt crisis.
Most historical examples of debt crises occurred in countries that borrowed in another country’s currency, he added.
To be fair, debt levels have been rising dramatically for decades. But those concerned about America’s debt burden today note that even though it has continued to pile up enormously during the pandemic emergency, as the federal government tried to prop up the economy, debt has continued to pile up without a similar emergency, to not to mention a global disaster on the scale of the global economy. War II.
Meanwhile, the trajectory of deficits and debt in the coming decades will frighten investors and policymakers more than current levels.
Krugman pointed out that governments, unlike individuals, do not have to pay off all their debts.
‘How did we pay off the debts from World War II? We didn’t do that,” he wrote. “When John F. Kennedy took office, the federal debt was slightly higher than in 1946. But the debt-to-GDP ratio was much lower, thanks to growth and inflation.”
Of course, the US still has to keep up with interest payments and maturing government bonds, and the cost of servicing all that debt is expected to exceed defense spending this year.
How to Solve America’s Debt
But Krugman says the key is stabilizing debt as a percentage of GDP, rather than paying it all off. He highlighted a recent study from the left-leaning Center for American Progress that estimates the U.S. will need to raise taxes or cut spending by 2.1. % of GDP to achieve that.
“That’s not a big number!” he added.
The tax revenues the U.S. government collects as a percentage of GDP are smaller than what other rich countries collect, and raising them enough to stabilize debt is unlikely to hurt growth, Krugman said.
Because the economics of stabilizing debt 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, especially the radicalization of the Republican Party. That radicalization concerns me greatly for several reasons, starting with the fate of democracy, and federal debt is nowhere near the top of the list. .”
Worsening US debt and budget deficits have raised more alarms, and the US presidential election has raised the stakes even higher.
Last month, ‘Bond King’ Bill Gross warned that Donald Trump would worsen deficits and be “more disruptive” to the bond market than Joe Biden.
Elsewhere on Wall Street, BlackRock CEO Larry Fink sounded the alarm in March, along with JPMorgan CEO Jamie Dimon and Bank of America CEO Brian Moynihan. And in April, Citadel’s Ken Griffin said the US is being “irresponsible” with its national debt.
Even Treasury Secretary Janet Yellen acknowledged in May that the prospects for higher interest rates in the long term will make it harder to keep deficits and debt levels under control.
This story originally appeared on Fortune.com
