Krugman: Yes, the debt is huge, but we’ve got bigger problems

By Paul Krugman / The New York Times

The United States government is more than $34 trillion in debt. Did you know that our government owes $34 trillion? That’s $34 trillion!

Whenever I write about economic policy, I get a lot of mail and a lot of comments basically asking why I’m not talking more about the national debt. So I thought it might be useful to talk about how I see the issue of public debt and why it doesn’t loom larger in my concerns.

Specifically, let me make three points. First, while $34 trillion is a very large figure, it’s a lot less scary than many imagine if you put it in historical and international context. Second, to the extent debt is a concern, making debt sustainable wouldn’t be at all hard in terms of the straight economics; it’s almost entirely a political problem. Finally, people who claim to be deeply concerned about debt are, all too often, hypocrites; the level of their hypocrisy often reaches the surreal.

How scary is the debt? It’s a big number, even if you exclude debt that is basically money that one arm of the government owes to another; debt held by the public is still around $27 trillion. But our economy is huge, too. Today, debt as a percentage of gross domestic product isn’t unprecedented, even in America: It’s roughly the same as it was at the end of World War II. It’s considerably lower than the corresponding number for Japan right now and far below Britain’s debt ratio at the end of World War II. In none of these cases was there anything resembling a debt crisis.

But haven’t there been many debt crises in history? What about Latin America in the 1980s, southern Europe in 2010-12 and others? Well, almost every debt crisis I’ve been able to find in the historical record involved a country that borrowed in someone else’s currency, which left it vulnerable to a liquidity crunch when lenders for some reason ran for the exits and it couldn’t print cash to pay them off until the panic subsided. In fact, the euro crisis rapidly faded away after Mario Draghi, then the president of the European Central Bank, said three words — “whatever it takes” — implying that the bank would provide cash to debtor nations under stress.

The only clear example I know of a national crisis brought on by high debt owed in the country’s own currency is France in 1926, and that story is extremely complicated.

Still, even many of us who don’t believe that the current level of debt will cause a financial and economic implosion can’t help feeling a bit uneasy over projections that show debt as a percentage of GDP rising steadily over the next 30 years. So what would it take to assuage this unease?

Bear in mind that governments, unlike individuals, never have to pay off their debt. How did we pay off the debt from World War II? We didn’t. Federal debt when John F. Kennedy took office was slightly higher than it had been in 1946. But debt as a percentage of GDP was way down, thanks to growth and inflation.

So what would it take to stabilize debt as a percentage of GDP for the next 30 years? Bobby Kogan and Jessica Vela of the Center for American Progress, working with Congressional Budget Office numbers, estimate that we would need to increase taxes or cut spending by 2.1% of GDP.

That isn’t a big number! (Yes, the exact number could be either bigger or smaller, but in either case probably not by enough to change the basic point.) America collects a much smaller percentage of its GDP in taxes than most other rich countries; collecting an extra 2 percentage points would still leave us a low-tax nation and would be unlikely to hurt the economy. If stabilizing debt seems hard, that’s only because given our deeply divided politics, even modest steps toward responsibility are extremely hard to take.

And by deeply divided politics I mostly mean Republicans, who declaim the evils of debt while pursuing policies that put long-run fiscal sustainability even farther out of reach. In a related analysis, Kogan and Vela estimate that permanently extending the 2017 Trump tax cuts — many of which are scheduled to expire after 2025 — would substantially worsen the fiscal outlook. Yet it’s hard to find Republicans in Congress opposing such an extension.

Worse yet, House Republicans are pushing for drastic cuts in the IRS budget, depriving the agency of the resources it needs to crack down on wealthy tax cheats. That is, even as they yell about budget deficits, they’re both seeking to cut taxes and trying to block efforts to collect the taxes high-income Americans owe under current law.

So politics — specifically right-wing politics — rather than the size of the debt is the problem.

Which explains why I don’t talk more about the debt. The United States, with its huge economy and relatively low taxes, isn’t facing a fundamental problem of fiscal sustainability. Given the political will, we could resolve debt concerns quite easily. To the extent that debt is a problem, that’s a reflection of political dysfunction, mainly the radicalization of the Republican Party. 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.

This article originally appeared in The New York Times.