May 25, 2023
Paul Krugman Warns US Debt-Cap Talks Risk Harming Future Prosperity
(Bloomberg) -- Nobel Prize-winning economist Paul Krugman played down concerns about the US government’s burgeoning debt ahead of potential default next week and said budget negotiators risked undermining the nation’s future prosperity by focusing their efforts to cut spending on such programs as education and child nutrition.
In an interview with Bloomberg’s David Westin for Friday’s Wall Street Week television program, Krugman said there’s no sign that the country’s ballooning debt is causing any problems in the financial markets or the economy.
“US debt is very high,” Krugman, who writes an opinion column for the New York Times and is a professor of economics at the City of University of New York, said. “But it’s not that high compared with what a lot of other countries have experienced over the years without any kind of crisis.”
Negotiating teams for President Joe Biden and House Speaker Kevin McCarthy are trying to hash out their differences over raising the government’s $31.4 trillion debt limit before the government loses its ability to meet all its payment obligations, possibly as soon as soon as June 1. The talks are focused on cuts in so-called discretionary spending, with both sides ruling out reductions in Social Security and Medicare expenditures for the elderly.
“A lot of the stuff that’s discretionary is really things like programs that support children,” Krugman said. “In the effort to hold down headline spending right now, we’re actually kind of disinvesting in the country’s future and that’s pretty alarming.”
He pushed back suggestions that the surge in US government debt would undermine the dollar’s role as the world’s reserve currency, arguing that there was no obvious candidate to replace it. Europe doesn’t have a big, unified bond market akin to US Treasuries while China has tight controls over the flows of capital into and out of the country.
What could hurt the greenback though is repeated brinkmanship over the debt ceiling and a series of defaults.
“If extortion over the debt limit becomes a routine affair, then people will stop wanting to use dollar securities,” Krugman said.
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