Paul Krugman: Is a U.S. debt crisis looming? Is it even possible?

Nonetheless, U.S. borrowing costs jumped, with the interest rate on 30-year government bonds surging from 4.03% on Monday to 4.32% on Thursday. Did Fitch do that? What was the market thinking? I have no idea.

The most obvious example is Japan, which has accumulated a lot more debt relative to GDP than we have, but which has defied predictions of an imminent debt crisis for decades. Even now, interest payments are substantially lower relative to GDP than they were in the early 1990s, but they’re up a lot from recent years. This has led some people to worry about a debt spiral: Higher interest payments lead to rising debt, which leads to even higher interest payments, adding even more debt, and we enter a sort of fiscal doom loop. Is this something to worry about?

But a few years ago, Olivier Blanchard, one of the world’s most respected macroeconomists, gave a presidential address to the American Economic Association in which he showed that historically, r has generally been less than g. Hence, no debt spiral. Which means that the issue is essentially political. As I said, you should ignore people who rant about TRILLIONS OF DOLLARS. You should also ignore people who rant about wasteful government spending. The federal government is basically an insurance company with an army: It spends mainly on things the public wants, like the military, Social Security and health programs. But we have an effective blocking coalition against raising taxes enough to pay for those programs.

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