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Ballooning U.S. debt has stirred growing alarm on Wall Street, but economist Paul Krugman isn\u2019t worried and said you shouldn\u2019t be either.<\/p>\n
In a New York Times op-ed<\/a> 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\u2019s current debt burden as well as the U.K.\u2019s postwar level, neither of which triggered a debt crisis.<\/p>\n Most historical examples of debt crises took place in countries that borrowed in another country\u2019s currency, he added. <\/p>\n 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.<\/p>\n Meanwhile, the trajectory of deficits and debt in the coming decades is spooking investors and policymakers more than the current levels. <\/p>\n Krugman pointed out that unlike individuals, governments don\u2019t have to pay off all their debt.<\/p>\n \u201cHow did we pay off the debt from World War II? We didn\u2019t,\u201d he wrote. \u201cFederal debt when John F. Kennedy took office was\u00a0slightly higher\u00a0than it had been in 1946. But debt as a percentage of G.D.P. was\u00a0way down, thanks to growth and inflation.\u201d<\/p>\n How to fix U.S. debt<\/strong><\/p>\n The key is stabilizing debt as a share of GDP rather than paying it all down, and Krugman highlighted a recent study from the left-leaning Center for American Progress<\/a> that estimates the U.S. needs to hike taxes or reduce spending by 2.1% of GDP to achieve that.<\/p>\n \u201cThat isn\u2019t a big number!\u201d he added.<\/p>\n 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\u2019t likely to hurt growth, Krugman said.<\/p>\n Since the economics of stabilizing the debt are relatively straight forward, the main obstacle is politics, he explained.<\/p>\n \u201cGiven the political will, we could resolve debt concerns quite easily,\u201d he wrote. \u201cTo the extent that debt is a problem, that\u2019s 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.\u201d<\/p>\n The worsening U.S. debt and deficit situation has been raising more red flags, and the U.S. presidential election has raised the stakes.<\/p>\n Last month, \u201cBond King\u201d Bill Gross warned that Donald Trump would worsen deficits<\/a> and be \u201cmore disruptive\u201d for the bond market than Joe Biden.<\/p>\n Elsewhere on Wall Street,\u00a0BlackRock CEO Larry Fink sounded the alarm<\/a> in March, joining JPMorgan CEO\u00a0Jamie Dimon<\/a>\u00a0and Bank of America\u00a0CEO\u00a0Brian Moynihan<\/a>. And in April,\u00a0Citadel\u2019s Ken Griffin<\/a>\u00a0said the U.S. is being \u201cirresponsible\u201d with national debt.<\/p>\n Even\u00a0Treasury Secretary Janet Yellen<\/a>\u00a0acknowledged in May that the outlook for higher rates over the long term will make it harder to keep deficits and debt expenses under control.<\/p>\n<\/div>\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n