Top News

Remember, the U.S. doesn’t have to pay off all its debt, and there’s an easy way to stabilize it, Nobel laureate Paul Krugman says

Remember, the U.S. doesn’t have to pay off all its debt, and there’s an easy way to stabilize it, Nobel laureate Paul Krugman says

Ballooning U.S. debt has stirred growing alarm on Wall Street, but economist Paul Krugman isn’t worried and said you shouldn’t be either.

In a New York Times op-ed on Thursday, the Nobel laureate wrote that while $34 trillion is a record, debt as a share of GDP roughly matches levels seen at the end of World War II and is well below Japan’s current debt burden as well as the U.K.’s postwar level, neither of which triggered a debt crisis.

Most historical examples of debt crises took place in countries that borrowed in another country’s currency, he added.

To be sure, debt has been soaring for decades. But those worried about U.S. debt levels today note that while it surged during the pandemic emergency when the federal government sought to prop up the economy, debt has continued to pile up without a comparable emergency, not to mention a global calamity on the scale of World War II.

Meanwhile, the trajectory of deficits and debt in the coming decades is spooking investors and policymakers more than the current levels.

Krugman pointed out that unlike individuals, governments don’t have to pay off all their debt.

“How did we pay off the debt from World War II? We didn’t,” he wrote. “Federal debt when John F. Kennedy took office was slightly higher than it had been in 1946. But debt as a percentage of G.D.P. was way down, thanks to growth and inflation.”

Of course, the U.S. must still keep up with interest payments and maturing Treasury bonds, and the cost of servicing all that debt expense is expected to exceed defense spending this year.

How to fix U.S. debt

But in Krugman’s view, the key is stabilizing debt as a share of GDP rather than paying it all down, and he highlighted a recent study from the left-leaning Center for American Progress that estimates the U.S. needs to hike taxes or reduce spending by 2.1% of GDP to achieve that.

“That isn’t a big number!” he added.

The tax revenue that the U.S. government collects as a share of GDP is smaller than what other wealthy countries collect, and increasing it enough to stabilize debt isn’t likely to hurt growth, Krugman said.

Since the economics of stabilizing the debt are relatively straight forward, the main obstacle is politics, he explained.

“Given the political will, we could resolve debt concerns quite easily,” he wrote. “To the extent that debt is a problem, that’s a reflection of political dysfunction, mainly the radicalization of the G.O.P. That radicalization deeply worries me for several reasons, starting with the fate of democracy, and federal debt is nowhere near the top of the list.”

The worsening U.S. debt and deficit situation has been raising more red flags, and the U.S. presidential election has raised the stakes.

Last month, “Bond King” Bill Gross warned that Donald Trump would worsen deficits and be “more disruptive” for the bond market than Joe Biden.

Elsewhere on Wall Street, BlackRock CEO Larry Fink sounded the alarm in March, joining JPMorgan CEO Jamie Dimon and Bank of America CEO Brian Moynihan. And in April, Citadel’s Ken Griffin said the U.S. is being “irresponsible” with national debt.

Even Treasury Secretary Janet Yellen acknowledged in May that the outlook for higher rates over the long term will make it harder to keep deficits and debt expenses under control.

This story was originally featured on Fortune.com

View Article Origin Here

Related Articles

Back to top button