Top economist Paul Krugman has a surprising take on the US’s towering $31 trillion national debt—suggesting it doesn’t need to be fully paid back. In a recent op-ed, Krugman countered the oft-cited analogy that equates government finances with household budgets, especially pertinent as the US faces potential default on some financial obligations.
Individuals, Krugman argues, have a lifecycle wherein they need to clear their debts. Governments, on the other hand, have a perpetuity aspect to them, with each passing generation providing a fresh influx of revenue. This fundamental difference, he insists, implies that governments must service their debts—meaning they must manage interest payments and principal repayments as bonds mature—but not necessarily completely pay them off.
This servicing of debt, according to Krugman, can be carried out through a cycle of issuing new bonds to repay the principal on old ones and, if necessary, even borrowing to meet interest payments, provided that overall debt growth doesn’t outstrip revenue growth significantly.
In context, even though the US’s debt-to-GDP ratio hovered around the 97% mark last year, the actual interest payment on that debt amounted to about $395 billion, based on figures from the Office of Management and Budget. That figure represents roughly 1% of the country’s GDP for the same year.
To bolster his argument, Krugman pointed out that it’s historically uncommon for governments to entirely repay large debts. For instance, Great Britain has largely retained the debt it amassed from as far back as the Napoleonic wars.
This perspective surfaces amidst intensifying debate over the US debt levels. Policymakers remain at odds over the terms for increasing the country’s borrowing limit. Kevin McCarthy, the House Speaker, has indicated he won’t approve a short-term hike in the debt ceiling without corresponding spending cuts, having proposed a bill to slash around $4.5 trillion in spending.
The clock is ticking, with less than two weeks for Congress to raise the borrowing limit before the government might exhaust its funds. As Treasury Secretary Janet Yellen warned, a default on the country’s obligations could spell disaster for financial markets. In light of these circumstances, Krugman advocates for abolishing the debt ceiling, arguing that the threat of a financial crisis provides too much leverage in fiscal policy discussions.