Don't panic about America's $34 trillion debt...yet, says Nobel-winning economist

$34 trillion in U.S. national debt may not be a ticking time bomb after all, according to one influential economist.

In his latest New York Times op-ed, Nobel-winning economist Paul Krugman says that the current federal debt is nowhere near historic levels in terms of the percentage of the GDP.

“The extent debt is a concern, making debt sustainable wouldn’t be at all hard in terms of the straight economics,” Krugman writes.

Besides, the U.S. has a built-in advantage denied to past debt crisis victims: it can borrow in its own currency. That means, as Krugman points out, that it doesn't have to repay all $34 trillion.

The numbers in economics context

While $34 trillion sounds like a jaw-dropping figure, it doesn't tell the whole story.

For a more apples-to-apples measure, economists look at the debt-to-GDP ratio, which is about 100% in the U.S., right around where it was after World War II, as a more meaningful measure.

Krugman points out the United States debt-to-GDP ratio is healthy compared to other economies right now. Japan, for instance, has a debt-to-GDP ratio over 260% currently without any doomsday scenario unfolding.

“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,” says Krugman.

“But debt as a percentage of G.D.P. was way down, thanks to growth and inflation.”

Krugman gives history lesson

People get squeamish about our current debt numbers because they fear a debt crisis like we saw in Latin America in the 1980’s or southern Europe in 2010-2012.

The critical difference there, as Krugman highlights, is that those crises involved countries that borrowed in a different currency than their own.

Those countries were left vulnerable when global lenders panicked and "ran for the exits." Without the ability to print the needed currency themselves, they faced severe liquidity problems that led to a debt crisis.

Even then, Krugman points out, the European debt crisis ‘rapidly faded away after the president of the European Central Bank said he would do whatever it takes to provide cash to indebted nations.

Krugman’s point? If history is any indication, there's no need to panic, at least not yet.

"Deeply divided politics" may be in the way

Krugman cites research stating that the United States would only need to increase taxes or cut spending by 2.9% of GDP to stabilize the debt-to-GDP ratio going forward.

However, Krugman says that political willpower is lacking.

He puts the blame squarely on the Republicans, who are looking at extending Trump’s 2017 tax cuts and stifling the ability of the IRS to enforce taxes owed on high-income individuals.

“To the extent that debt is a problem, that’s a reflection of political dysfunction, mainly the radicalization of the G.O.P,” says Krugman.”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.”