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Brian Lehrer: It's the Brian Lehrer Show on WNYC. Good morning again, everyone, and Happy New Year again, everyone. Happy 2024 and happy year of the $34 trillion United States government debt. That figure has been in the news since New Year's but with very little context about how to process such a mind-numbingly big number. Is $34 trillion, a red flag data point, a normal acceptable figure considering the size of our overall economy? Does it portend trouble ahead for Medicare and Social Security and inflation and devaluation of the dollar, or just a big round, but not that bad number for Republican politicians to take aim at in an election year as a scare tactic?

We'll get a take on this now from none other than New York Times columnist and CUNY Graduate Center Professor, Paul Krugman. He's known as an economic progressive who takes no prisoners when it comes to Republican truth twisting, but he also did write a column in October called Why We Should, but Won't Reduce the Budget Deficit. Let's see what he thinks. Dr. Krugman, always good to have you on the show. Welcome back to WNYC.

Paul Krugman: Hi, good to be back on.

Brian Lehrer: First, let me ask you to put that $34 trillion figure in perspective. Open-ended question, how do we begin to process what that kind of number with so many zeros means in human terms?

Paul Krugman: Okay. First thing to say is this is America. Everything about America is gigantic, and so, anything you name, even how obscure it is, it's going to be a gigantic number. The right way, people generally put it as a percentage of GDP. The $34 trillion is partly money that the US government owes to itself. It's a little bit complicated, but that's the gross number that appears on the desk, but it's not all owed to the public. Some of it is owed to the Social Security Administration. Some of it is owed to the Federal Reserve, which is effectively part of the government, at least for these purposes.

It's somewhat less than that. Where we are is it's over 100% of GDP, which is not great, but lots of countries, including us, have had debt levels this high, or in some cases, much higher, without getting into serious trouble. The number itself is in context not what it would be-- If I could wave a magic wand and make half of it go away, sure, but we're not on the edge of any kind of catastrophe.

Brian Lehrer: To wonk out a little bit, coming out of that answer, the relationship with GDP, GDP is roughly the size of the overall economy of the country, -

Paul Krugman: That's correct. True.

Brian Lehrer: -or you can describe it a little more specifically than that with your expertise. If the deficit, the total national debt becomes bigger than the size of the economy at a given point in time, that's a problem, or explain that.

Paul Krugman: No, not really. It's, GDP is the value of all stuff produced in the economy, roughly speaking. The reason that we look at GDP is because, at some level, it's the tax base. We have a government, the government can tax pretty much anything it wants to. GDP represents all the stuff that the government can tax. Obviously, it isn't ever going to tax all of it, but it's a substantial part. The GDP roughly is a measure of the potential revenue of the government. It's an amount per year. The debt is just a number, it's the total amount that the government owes.

It's like, if somebody has a mortgage that is more than their annual income, that's quite common. That happens all the time and nobody says, "Oh, that's terrible. That's a catastrophe," because the question is, what is the cost of servicing the mortgage and how does that compare with the family's resources? If you ask, is the cost of interest on this debt, and even that, if we can get into it, is not really the right number, is the cost of interest on this debt unpayable given the resources available to the federal government? No, it's not. It's, always you want to scale these things. We just use GDP as a kind of convenient indicator of how big is the base on which the government can draw.

Brian Lehrer: Listeners, I see calls are coming in, so I want to make sure everybody has the phone number. A rare opportunity to ask Paul Krugman a question directly, which can be about this particular topic that we're talking about, the $34 trillion national debt, or about anything else having to do with economics in the United States today. Any of his columns, whatever, his books, anything you want to ask Paul Krugman, but you never had him over to your New Year's Eve party, 212-433-WNYC, 212-433-9692, call or text. Your October column, Why We Should, but Won't Reduce the Budget Deficit, that makes it sound like you're more concerned than in your previous answer.

Paul Krugman: Yes, I'm more concerned than I was in the past part because it has gotten bigger, which causes some problems, partly because when I wrote that, interest rates on government borrowing had gotten pretty high, which makes you worry more about the debt snowballing. Now, those interest rates have come down a lot since I wrote that. Part of the concerns I had have diminished, but look, it would be, if we had a smaller government budget deficit, the budget deficit does two things. It adds to the debt, which matters, but isn't nearly as critical as lots of people think.

It also adds spending power to the economy, which is somewhat inflationary. Now, we've actually gotten inflation under control pretty much right now. Nobody will believe, but we have. We've done it partly by raising interest rates a lot. If the budget deficit was smaller, we could cut interest rates further and faster than it looks likely that we're going to, which would be a good thing. This is a time where much more than five years ago, the budget deficit was really just nothing too, shouldn't have been an issue at all. Now the deficit is bigger, the circumstances are a little bit less favorable. If you could deal with it, if you could do something great like actually start collecting all the money that wealthy tax evaders, oh, that would be more helpful even than in the past.

Brian Lehrer: I saw that that column of yours in October focused largely on long-term interest rates as something worrisome for you. Why long-term interest rates?

Paul Krugman: Short-term interest rates, first, move around a lot because they're a policy tool. Anyway, first of all, the government does a lot of its borrowing long-term, and even if it doesn't, what we're interested in is how much is it going to cost to finance the government, and long-term interest rates are the market's forecast of what average short-term interest rates are going to be over the long-term.

Long-term interest rates are your gauge of how expensive is it to raise this money. They shot up for a while there to levels that were well above, where they've been very low for many years, and they've shot up to about 5% for a little while there. They're now under 4%, or they were when I last checked the financial news this morning. That takes off a fair bit of the pressure, but yes, the interest rate on overnight money may be what the Federal Reserve targets, but it's not really important if we're talking about these issues.

Brian Lehrer: Right. If the long-term interest rates are high and the government is borrowing a lot of money, the percentage of our tax dollar that goes just to paying off debt before they give us any government services is going to be higher. Long-term interest rates are a problem for that reason if I understand you correctly.

Paul Krugman: Yes, and even there, the government can run deficits. The government is not constrained by the amounts of cash available, not now in the United States and not for truly many years to come, but you do worry a little bit about the possibility of snowballing debt that you borrow to cover your expenses, then you have to pay interest on the borrowing, and then that means more interest payments in the future and so on. When long-term interest rates are high, that snowballing process becomes a bigger concern. You always want to offset against that, the fact that the US economy is growing and inflation is gradually reducing the purchasing power of that debt.

It's R minus G if you're doing this stuff as an economist talking in cryptic language, you compare the interest rate adjusted for inflation on government borrowing with the real growth rate of the economy. For most of the past 20 years, R has been less than G. There really isn't any snowballing effect. But lately, R has been a bit more than G, and so you get more concerned, but I think that the main thing in all of this is to appreciate that something can be concerning without being hair-on-fire concerning. That's where we are on this.

Brian Lehrer: Yes. By the way, let me ask you just a curious consumer question on short and long-term interest rates, something that some of our listeners may have run into if they tried to buy a normal bank CD because it looks like interest rates for bank CDs are inverted. That is, I see you can buy a one-year certificate of deposit now that returns around 5%, depending on the bank, but longer-term CDs pay lower interest rates, even though the bank gets to hold and invest your money for longer. Isn't that backwards from the way things usually work?

Paul Krugman: It is. It's an inverted yield curve, again, to use more econo jargon. What's happening here is when the bank offers you an interest rate on a CD, if they offer you an interest rate on a two-year CD, they have to bear in mind that they are going to either invest the money for two year, but think of them as investing it short term. They're going to invest the money for one year, and then reinvest it for Year 2. If they think that one-year interest rates are going to be lower a year from now than they are today, then they're going to offer a lower interest rate on a two-year CD than a one-year.

They do expect interest rates to be lower because where we are right now is that ultimately short-term interest rates are controlled by Jay Powell on the Federal Reserve, which raised rates a lot in 2022 to fight inflation and is now by everybody's projection going to lower them a lot now that inflation has come way down. The bank is expecting, the markets are expecting short-term interest rates to come down, which is why you get paid less on a two-year CD than a one-year CD.

Brian Lehrer: Here's a question from a listener via text message. We'll go to the phones in a minute. First one though from a texter writes, "I would love to hear the guest talk about student loan debt and the economic impacts of both the increasing debt and options for forgiveness when it comes to student loans."

Paul Krugman: A lot of student loan debt is basically government-guaranteed. It's, we have the easy power to forgive most or all of it, and the main reason for doing that, there are some economic costs, and when you have a lot of people who are coming out of school with a lot of debt that really does tie down their personal options. It immobilizes them. It reduces the dynamism of the economy a bit, but also a lot of it is just it shouldn't have happened. We had a lot of debt run up for education of dubious value. In general, we want an educated populace, and then we say, "Okay, everybody get educated.

Oh, by the way, you're now in debt servitude for many years." The trouble is that the Biden administration has done pretty much as much in the way of forgiveness as it can without control of Congress, which it doesn't have now and barely had even in the first two years, or the approval of the Supreme Court, and so they've been knocked back a bit. Student debt is like everything with the US. It's a big number, it's trillions of dollars, but it's not like mortgage debt, which is a huge number and is decisive for the economy in many ways. I would say basically, given the political realities, we get as much student debt forgiveness and forbearance as we can, but it's not going to move the needle much in terms of what you think is going to happen to the US economy.

Brian Lehrer: David in Inwood on the $34 trillion federal debt. David, you're on WNYC with Paul Krugman.

David: Hiya, Brian, long-time supporter and fan. We're talking about this big number, and I'm wondering, to whom do we owe this money to? Are some of it owed to foreign governments and entities? Who lends the government the money and who do we owe this money to? Thank you.

Brian Lehrer: Thank you.

Paul Krugman: Yes. That's a very good question and the answer is some of it is foreign individuals, some of it is foreign governments. A lot of it is US citizens and residents and corporations and banks. It's a bunch of people. There's a completely different number, which, the total amount that the US owes to the rest of the world, which is a very big number, a lot of that is private debt. To a very large extent, though, really, at some level, it's money we owe to ourselves. When people say we're burdening our children with debt, what we're actually doing is there's a bunch of money that US citizens in their wearing the clothes of the Federal government owe to US citizens wearing the clothes of investors. Most of it is not actually a net claim on the future, most of it is a claim of one group of Americans on another group of Americans.

Brian Lehrer: To that point, NPR Morning Edition had a Bernie Sanders adviser on this week, on the $34 trillion national debt, who said the debt is nothing to worry about because it really means the government is putting money in our pockets. It's printing money that it distributes into the private economy without taxing back. If it's distributing more money than it's taxing, then the national debt turns out to be like a subsidy of Americans. I'm not sure I buy it in those terms. Have you heard that explanation of the debt?

Paul Krugman: Yes, it's [unintelligible 00:16:31] There is a view which I 90% share, which is that the number on the debt doesn't really matter. What really matters is basically looking at who's giving money to whom. Now, the thing is, however, that the US economy does have limited resources, so if we hand out a lot of money, then someone somewhere has to spend less. It's different when the economy is depressed, but it's not. We have 3.7% unemployment, so we're a communist running pretty hot. If we give one group of people more money to spend and buy more stuff, then we've got to persuade someone else to buy less stuff to make room for those purchases.

That's the sense in which it's not harmless re-running a budget deficit. It is at the very least reshuffling. It's going to require that somebody pay. At the moment, what we're doing is we have relatively high interest rates. The money that's being handed out in the form of budget deficits is being offset to a certain degree by reduced purchases of new homes, by reduced investments. There have been some green energy projects that have been canceled because of high-interest rates. I feel like that is the kind of thing where you do worry at least a little bit about budget deficits.

Brian Lehrer: How much of the $34 trillion does China own?

Paul Krugman: Oh, gosh, I actually haven't even updated on that, but that is the last thing you should be worried about. What's China going to do? One person, I think Dean Baker, a friend of mine, said about the fact that China owns a fair bit of US debt, that China has an empty water pistol pointed at America's head. When you try and think it through, so the Chinese say, "We don't like that US debt. We're going to sell it off." Then somebody else will buy it, might weaken the dollar a bit, but there's some US manufacturing would actually welcome a weaker dollar.

The idea that this somehow gives China leverage over the United States, if anything, it's the other way around, is that if there's a real rupture between China and America, China suddenly finds that a lot of its assets, which are US debt, I don't think we're going to get to it. I hope we don't get to that point, but think of it as, there were a lot of foreign assets that Russia owned when it invaded Ukraine. That didn't make Russia stronger. It made Russia weaker because it meant that Putin could have some of his assets seized.

Brian Lehrer: Elmo in Englewood, you're on WNYC with Dr. Paul Krugman. Hi, Elmo.

Elmo: Good morning. It's always a pleasure to speak with you. I love Dr. Krugman. He's great. I've got some questions. One, debt that we get, that's owed to American citizens are basically owed to rich people. These are people that did not pay taxes, that have been starving the United States government so that we have to borrow more money. Am I correct?

Paul Krugman: Some of it is. You got to bear in mind that a lot of it is owed to things like pension funds, and insurance companies. A lot of it is indirectly claims by middle-class Americans. It's not just rich people. Yes, all financial assets, stocks especially, but US government bonds too, are disproportionately owned by relatively rich people. It's not a great idea for our future credibility, if we just say, "Okay, we're not paying," but it is a good idea to say that at least a significant part of the process of bringing down those budget deficits should come from getting richer people to pay more taxes, including the taxes that they already owe under the law.

Brian Lehrer: A listener writes in a text message, "I want to find out what happens to Social Security with a national debt."

Paul Krugman: Okay. Social Security, the national debt is the least of the issues. It's, a few trillion more or less than the national debt isn't going to be an issue. Social Security, the basic issue is, it's a system that, for historical reasons, has its own budget. We've got a dedicated tax, the FICA, on your paycheck is going to pay for benefits. We have an aging population so there are a number of retirees collecting relative to the number of workers paying in is declining. That means that probably at some point, something has to give. There won't be enough money coming in from FICA to pay full benefits.

First of all, even if that happened, even if on the scenario where the Social Security Trust Fund is completely exhausted and we have to live entirely on current revenues, and nothing happens, that would lead to something like a 25% cut in benefits 15, 20 years from now. That is not going to happen. Older people vote. The amount of money it would take to make Social Security able to continue paying full benefits is really not that big as a share of the federal budget. Something needs to be done. Social Security, it's a way overrated issue. Medicare is actually a much bigger concern in terms of fiscal sustainability.

There's some good news in there. One of the things that doesn't get factored into these discussions enough is that there's been a miracle in terms of Medicare cost control. After years and years in which Medicare would have got more and more expensive relative to the size of the tax base, it has basically flattened out for the past 10 years. Something is going right in terms of healthcare costs.

Social Security, Medicare, and Medicaid, people often say there's one word, that's a big chunk of money. All of it is somewhat tied to the aging population. Medicare, Social Security is age related. Medicare is age-related. Most of the people on Medicaid are young, but most of the money goes to old people because us old codgers are much more expensive to treat. There's an issue there. It's 2% or 3% of GDP, maybe more, where the money must eventually be found, which is, in economic terms, not a big deal. In political terms, God help us because of the dysfunctionality of the US political process, but it is essentially a political problem.

Brian Lehrer: Last question, coming out of that last answer, in our last minute, about another story that's been in the news, and I wonder if you as somebody who writes about economics thinks it's related. All these asylum seekers and other migrants coming into New York and coming into the country, who get portrayed as an economic burden in the short run because of all the services that they require, obviously, a very big issue in New York City. If these folks are by and large, much younger than the American population as a whole, are we planting the seeds by opening the doors very wide, maybe even wider than we have them for more of a balanced budget in the future, or is that the wrong way to look at it because they'll need a lot of services?

Paul Krugman: No. It's exactly the right way to look at it. The services issue. Typically, the first few months after somebody arrives, they might need a lot of services, but bringing in younger workers, who will be paying into the system for decades before they start to collect benefits is exactly what the doctor ordered. A sufficiently higher immigration would solve our long-run fiscal problem. One of the cynical things but undocumented immigrants are even better from a fiscal point of view because they actually do pay taxes, but they aren't entitled to benefits.

That's not the way you want to run a country, but no, immigration, if you want to ask what would improve long-run budget projections in a way that made us look much, much more sustainable than we do under current projections, the answer would be higher immigration. It's the best thing that you can do.

Brian Lehrer: Paul Krugman Nobel laureate in economics, New York Times columnist, distinguished professor at the City University of New York Graduate Center, and author of many books, including his latest Arguing with Zombies: Economics, Politics, and the Fight for a Better Future. Always good to have you on. Thank you so much.

Paul Krugman: Thanks a lot.

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