Reuters World News - Debt - Paul Krugman joins our new economics podcast

Episode Date: May 29, 2024

US government debt isn't a crisis to Paul Krugman. The Nobel laureate has long argued that history and arithmetic suggest a crisis is unlikely. But does that hold true in other countries around the world? Can they live with the levels of debt that have become the norm, or is there a nasty shock or full-blown crisis in the offing? Krugman joins host Carmel Crimmins to talk global debt, spending and the politics driving decision-making. Plus, we take a ride on a Berlin commuter train for a real world look at the downside of balancing the books. Sign up for the Reuters Econ World newsletter here. Visit the Thomson Reuters Privacy Statement for information on our privacy and data protection practices. You may also visit megaphone.fm/adchoices to opt out of targeted advertising. Learn more about your ad choices. Visit megaphone.fm/adchoices

Let's talk about the big D. Debt. Did that get your heart beating a little faster? Is that because you're nervous about your credit cards and your mortgage? Or just an economics nerd keen to hear more about this key concept? Either way, check out the latest episode of our new Econ World podcast with Carmel Grimmons. Noble laureate Paul Krugman will be talking about why he's not worried about ballooning U.S. government debt levels. and we'll see why Germany's reputation for efficiency is quickly derailed when you look at their train timetables.

Listen now and subscribe to the podcast and accompanying newsletter on Reuters.com. Neither a borrower nor a lender be. So says Polonius to his son in Hamlet. The kids leaving for university in Paris. Clearly unencumbered by any student debt. Simpler times. The fact is most people need to borrow at some point in their life. The same is true for governments.

They took on huge quantities of debt to help their economies navigate COVID. And now they've got new crises to grapple with, aging populations, climate change, and wars. All added to the global tab. So we thought on this episode of Reuters Econ World, we'd look at debt. We talked to Paul Krugman, the Nobel Laureate,

about why he's not worried about ballooning US debt levels. But does that argument hold for the rest of the world? particularly when a lower growth outlook is exacerbating the debt burden. And we take a brief trip to Germany, a country where debt is taboo, but public investment and punctual trains are badly needed. It's all part of the job here on Reuters Econ World. Every week, we pick a phrase or buzzword and go deep

on the economic principles and ideas driving the biggest news around the world. I'm your host, Carmel Crimmons, in Dublin. Debt has been around since. forever. Okay, the dinosaurs weren't riding each other IOUs here, but we are talking thousands of years. And it gets a bad rap. In ancient times, debt was often viewed as sinful. But the fact is, it's crucial for economic growth. You have to borrow money to build stuff. But it can also be a catalyst for crisis. Governments can go broke. So do we need to be worrying about government finances, and in particular in the United States, the North Star of the global economy.

To find out, I spoke with one of the world's best-known economists, someone with a Nobel Prize, and a long track record on the debate around debt. Paul Krugman. Paul, welcome. Hi there. So you've been talking and writing about debt for a while, and you have a reputation, if I can sum it up, as someone who's advised against undue alarm over US government debt levels. Is that fair? That is fair. I think there's a lot of panic about it that is unjustified. So I just want to give our listeners some information here because not all of them are going to be following every twist and turn of where the US is at with its debt and its deficit. So current debt levels are around 97% of GDP and the non-partisan Congressional Budget Office is warning

that that could rise to about 166% over the next 30 years. Now, generally speaking, the higher a country's debt-to-GDP ratio, the higher the risk of default. So just to pull you back on this, why aren't you more alarmed? Like, I feel like I should be alarmed. Well, the first thing to say is it's not at all clear that if you want to look, that the problem of servicing the debt is really a lot smaller, even with big numbers than people think, because you don't have to pay down the debt. Nobody paid off the debt from World War II. Right. We just sort of grew our way out of it. And so what matters is, you know, does the interest on the debt exceed the rate of growth of the economy? And even now, even with higher interest rates, the answer is,

no, it's about, they're about the same. So it's not clear that there's really any sort of, to the extent that we worry about being able to pay our bills, it's not clear that the level of the debt matters. There is a question of whether we're able to pay our bills and the fact that the debt is going to rise as a sphere of GDP, at least according to the projections, does, is a projection that we're not going to be fully paying our bills, which could be a problem. But, you know, if you look at the history, even those debt levels that CBO is projecting are not out of, they're high by the U.S. historical standards. They're high by recent, relatively recent standards in a lot of other countries, but they're not by no means outside the range of debt that

countries have coped with just fine. But if we could circle back to the interest rates, you mentioned there, provided, you know, the rate of growth is bigger than the rate of interest, the rate of which you're paying it back, then things should be okay. And interest rates have been at record lows up until recently. But if those long-term interest rates spike and stay high and stay above the rate of growth, then we could get into a problem, right? Yes, but the first thing to say is, Have we ever actually seen that in a country that borrows in its own currency? So if you look at, if we think about Greece or people always complain about the Hellenization of our discourse here, everybody talks about Greece, Greece, Greece, but... You can refer to Ireland. We've had our debt troubles.

Yeah. But the thing about all of both Greece and Ireland and Portugal and Spain and all of that was these are all Euro area countries. Right. And their problem was they could run out of money because they couldn't. It wasn't their own money. And if you try to find an example of a Greek-style debt crisis that for a country that was borrowing in its own money, I've spent a lot of time on historical records. You really just don't find it. You know, we can talk about France in 1926, maybe kind of. And if you look at a little bit further back in history, not just the...

the Euro crisis of 15 years ago, but Britain came out of World War II with debt that was 250% of GDP. And it never paid off that debt. It just grew its way out of it. And so history doesn't give us much reason to think that these are particularly alarming numbers. Yeah. I mean, I'd rather not, but this is not, but panic doesn't seem appropriate. There's this question, And what happens if a country begins to seem unreliable? Right. If it looks politically unstable or is run by people who are erratic, which is obviously something that could happen to any of us and particularly could happen to us here in the United

States very soon. But the debt per se is not the problem. Right. You put it quite nicely there. So the debt per se might not be the problem, but the politics can matter. And I suppose we did see that in the UK when Liz Truss tried to bring her spending plans forward and the markets reacted quite violently? Yeah. Well, that was interesting. That was complicated. And it was one of these weird things where there was a lot of dislocation involving

insurance companies. And what we learned a lot in the past 15 years or so is how much the plumbing of the financial markets can actually get you into trouble. Right. But we do have an issue, which I think is not all that related to the specific number on debt, or even, you know, it would be the same issue, even if the debt was much smaller, which is that we do have political deadlock in the United States and the UK in different ways over how to pay for the things we want. Right. A lot of that comes down to, look, the U.S. government, old line, is basically an insurance company with an army.

It's basically social programs, most of which most of the money goes for older people. and we are getting older. The baby bust and immigration makes up for some of it, but not all. So we have an aging population, which means growing demands on government programs. So you either at some point need to cut the benefits, which are in the United States, are already pretty thin compared with most other advanced countries, or you have to raise some more money through taxes, which is certainly economically feasible for the U.S., which is a low-tax country. But say to politicians, let's do either of those things, and they say, why don't you just shoot me now? I mean, it's, so we're kind of stuck.

And is that why we're just not hearing that much about the debt in the current presidential campaign? I mean, it's striking, really. Back in the early 1990s, a ballooning national debt was like the hottest topic in American politics. And you'd Ross Perot securing nearly 19% of the vote back in the 1992 presidential election. But we're just not hearing it now. Have people given up? Well, to some extent, it's a mixture. First of all, the boy who cried wolf.

What some of us called, the very serious people have been warning about the debt for, you know, as you say, it's now 30 years of ominous warnings about debt is going to ruin us. And it keeps on not happening. And at a certain point, people tune out. And then how would either party in the United States try to make the debt an issue? If Republicans, they try, you know, they say, oh, no, death is excessive. And you're saying, well, in that case, how about not making the Trump tax cuts permanent? And they say, oh, no, those tax cuts must be made permanent. And that's $6 trillion right there that they refuse to give up on.

Say to Democrats, well, how about we cut Social Security benefits and throw people off Medicare. And, well, they're not going to do that, especially given that the Republicans are refusing to, you know, we almost had a deal under Obama that would have done some small benefit cuts in return for a small tax increase, and Republicans killed it because they were unwilling to accept any tax increase as part of a debt deal. So who's going to campaign on it now? It's not an issue that resonates with voters. It's not an issue on which either party is prepared to make concessions. But the U.S. and its debt levels and where it's at economically, it does have a ripple effect, right? I mean, I think the IMF warned that the surge in U.S. debt and Chinese debt could have a profound impact on the global economy.

And you do see that in the emerging markets, right? Yeah, really, it's the interest rates, which is highly questionable how much that's linked to debt. But rising interest rates definitely have ripple effects. Now, not as much as they used to. There are more countries now that can, in fact, borrow their own currencies. And in general, emerging markets have been a lot more robust in the fact. face of economic difficulties and the wealthy countries this cycle than they have in the past, or at least the middle tier. There's a whole other issue involving very low-income countries.

But it does have ripple effects, but there are a lot of reasons to be unhappy about high interest rates, which is not quite the same thing as being unhappy about debt. Yeah. I mean, interest rates, as they said, been benign for a long time, right? You mentioned the U.S.'s strong growth, not the same story across the pond. growth rates have been quite anemic, right? And is Europe in a sort of a different state to America then? Does it need to get its fiscal house in order, as it were? Like, does it need to get lean and mean again? You know, obviously debt grew during the pandemic, but we're not getting the growth rates that we're seeing in the U.S. Yeah, although that story could go the opposite way. Right.

The U.S. had a stronger fiscal response to the pandemic than Europe did and is now reaping the rewards. Yeah. possibly. That might be one explanation of faster growth. And so it's possible that basically Europe's relative restraint on spending has actually been self-defeating. It's also the case, and this is very quite important, that the U.S. has other stuff, again, kind of unrelated to the debt, but that make it probably are contributing to things going pretty well. Demography, as I was saying, demography is kind of core to all of this, but the U.S. demographic situation for the past several years has been more favorable from GDP point of view because of substantial

surge in immigration. Now, obviously, there are a lot of people who are very upset about that, but it's in terms of good GDP numbers, in terms of servicing the debt, the more the better. Yeah. The U.S. productivity growth has been pulling ahead relative to Europe, and we don't really know why, and we don't know whether it's a permanent thing. But that's not an argument that says that you need to tighten your belts fiscally. Is it the opposite then? Do they need to spend their way? Maybe the opposite or spend more on sort of investment. Right. And it's kind of interesting that if we look at recent data, which major European economy has actually done the best in the last

few years? And it's actually Italy. And Italy has been doing more spending, less fiscal austerity. And it's been spending on infrastructure. And having spent time in both places, let me tell you, I would take Italian train service over British train service any day. Sticking with that railway theme, it's that time on our show when we bring you a real-world example of what we're talking about. And this week, we head to Germany, where an obsession with fiscal discipline has meant years of underinvestment in infrastructure, including the rail service. Economics correspondent Maria Martinez has been riding trains around Berlin and filed this report. I have just arrived to Berlin Central Station.

Let me have a quick look at the departures more. Okay. The first train is delayed. It should have to party 20 minutes ago. It says 20 minutes delay, but actually I think it's already more than 20 minutes. And I can also see a train cancellation. Yeah, and just here, Deutsche Bank has the information point. There's a big line, and yeah, the customers don't look happy.

Jean Klein works in corporate finance, and he's living in Berlin. But his family is in Heidelberg, so he goes often to see them all, and he takes the train. But the problem is that cancellations happen so often that he is. even has some tricks in case this happens. Well, so usually I book months in advance, knowing very well that there's a high likelihood of the train being cancelled. So while you constantly check on your app, they do notify you before, sometimes they don't notify you very late. But there's a trick to book a seat on a different train, and then you can take that, but it's become like a normal kind of procedure to do it.

Carol Stern is an architect. He works in Berlin, but he travels often for work. And he was telling me that he books a train the day before the meeting and he books a hotel night because he's just too afraid of taking the train in the morning and being late for his meetings. Or that the train is just simply canceled and he doesn't make it to the meeting. It does prevent me from taking more trains, for example, time-wise, Frankfurt Berlin would be more efficient with the train, but I just, I mean, I have, I mean, I discard that option because I don't have so many positive experiences on it.

And also price-wise, like the prices are really high if you compare them to fly prices. We can see it very clearly in infrastructure. When you don't invest for decades, it's very difficult to solve the problem. one year to another. Now, actually, the government plans to increase investment in the railroad system. But in the near term, that's bad news for the passengers, because that means that many parts are going to be under construction, so they're going to be more delays and cancellations. But the hope is that by 2030, this situation should improve.

So what advice would you give the German government right now? now, it's being described again as the sick man of Europe, and yet it has this debt break, kind of a built-in curb on borrowing. What advice would you give Germany? Yeah, the Black Zero in Germany is a, it's a real problem. Yeah. Germany has, as has the UK, but has massively underinvested in infrastructure. And, you know, if there's one thing for which debt is definitely a good thing, I mean, it is problematic if you're borrowing to pay for social benefits. But if you're borrowing to pay for transportation networks, ports, and all of that, that's exactly what you're supposed to borrow for.

And the Germans have been unwilling to do that. And it is kind of shocking that Germany is, after having been so proud of their fiscal discipline, turns out to have possibly fiscal discipline themselves into a protracted stagnation. That is the big problem, though, with debt, isn't it, though, that it could prevent us from doing what we need to do. Like if so much of your budget is taken up with paying off interest, for instance, it possibly prevents you from spending money where it matters. Like, climate change, you spoke about climate change. Like, is that the big cautionary tale here? Is this what we really should be worried about when it comes to debt?

Well, the funny thing, though, is that you aren't actually, I mean, yes, interest payments are a substantial part of spending. in pretty much all major economies. And growing, though, right? Like, expect it to grow as a proportion as well. And it's expected to grow. But on the other hand, you do want to kind of say, look, since you never actually have to pay off debt, all that you really have to do is stabilize it as a share of GDP.

Then if you ask how big are interest payments net of inflation and real growth, they're not actually a big number for any of us. So it's not really a restraint. And to the extent that debt inhibits us from investing in things that we need to do, it's actually not really the, it's not the financial constraint created by debt. It's more of the constraints it creates in people's minds. And in the case of Germany, it certainly, the Germany would have no trouble borrowing money to fix its strains. They could do that. No, markets would happily lend them the money.

But the German political system has decided that debt. is a terrible thing, and we cannot incur debt to do this. And so that's kind of a weird, that's a meta thing, right? It's not the debt per se, but it's how people feel about the debt that is the problem. Can I ask one final question? What, if anything, economic-wise, keeps you up at night? Okay, totally off almost all of this stuff, although somewhat related, but I'm actually –

Go on. Well, I'm actually worried about two things. This head runs the risk of turning into a Monte Python routine amongst the things that worry me. So one, as I am worried, domestically, we may very well have a Trump presidency coming up. And there are a lot of things, economics is not the top of my list of worries about that. But we have actually had one of Trump's chief economic advisors interviewed in jail, where he is right now, Peter Navarro, saying that within 100 days they'll fire the head of the Federal Reserve. And basically, they're going to politicize monetary policy. And that's a, it's quite easy to.

imagine that the United States stops behaving like an advanced country in terms of economic policy. Right. The even bigger, well, that's a huge risk, but the even bigger risk is, look, geopolitics. What we've been learning these past few years is just that there's a lot of interdependence, and if you believe that an interdependent world would become a peaceful and safe world, because who would want to upset that? Well, recent events have not given you much confidence in that. Now, if I want me to say something hopeful, go on. Yeah, do. It is that advanced, sophisticated advanced countries have enormous capacity to adapt,

if given a little time and given some political will. You may remember how Russia cutting off natural gas was going to plunge Europe into the dark. The lights stayed on. The lights are still on in Berlin, you know. So we have ways of, but I worry about sudden, disruptive shocks and, you know, the world looks like a much more dangerous place than I think any of us would have imagined six, seven years ago. The Trump campaign has said that unless a message is coming directly from President Trump or an authorized member of his team, no aspect of future

presidential staffing or policy announcements should be deemed official. Paul, thank you so much. Thank you. I've got to ask, because it's my kid's sports day. What's the medal hanging behind you? You could question. I have no idea. It's not your Nobel. It's not, I wish it were, in fact. No, the Nobel is in a drawer here somewhere. It's, you know, it was my father always used to say the days when praises were lower, but, you know, that on a quarter roll gets a cup of coffee. And that's kind of how it is.

It doesn't really matter very much. Paul Krugman, thank you so much for your time. And thank you for your time and for listening. This was our second show. We had the fear we might suffer from difficult second album syndrome with this episode, but Paula Maria made it easy. A big thank you to both of them, to our European economics editor Mark John,

and to everyone who covers economics at Reuters for all their help. Every week on Econ World, we set out to explore one economic principle behind the news. We give you some historical context, a real world example, and an in-depth discussion with someone in the know. Let me know what you think of the show. Reach out on LinkedIn or X.

Leave us your thoughts in the comments section wherever you listen. There's a newsletter to accompany the pod. You can subscribe to it on Reuters.com. Next week, we're going to be tackling currencies on what a strong dollar means for you, wherever you live in the world. Jonah Green was the producer on this week's show. Sound design was by Josh Summer.

Leila de Kretza is our executive producer. Our podcast team includes Kim Vinal, Tara Oaks, Chris Wall Jasper, David Spencer and Gail Issa. I'm your host, Carmel Crimmons. Remember, for all your daily news, check out Reuters World News, our weekday show.