Paul Krugman On National Debt

August 23, 2009, 5:54 pm

How big is $9 trillion?

There’s been some hysteria about the administration’s new estimate that the cumulative deficit will be $9 trillion over the next decade. Don’t get me wrong: this is bad. But it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t.

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.

Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. (There are some technical issues in comparing these various numbers — gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don’t change the basic picture.)

Again, the debt outlook is bad. But we’re not looking at something inconceivable, impossible to deal with; we’re looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with.