Nobel laureate in economics Paul Krugman recently stated that the United States needs to deal with its soaring budget deficit, and there are only two available solutions. However, in the current congressional situation, the government may not do so.
Krugman is a well-known American economist who served as a professor in the Department of Economics at Princeton University and is currently a professor in the Department of Economics at City University of New York. In 2008, he was awarded the Nobel Prize in Economics for his "analysis of trade patterns and regions in economic activities".
Krugman pointed out that two ways to control deficits are to reduce social project spending or raise taxes. Due to the split of the US Congress, neither scenario is likely to occur.
Although we don't have to panic about budget deficits, reducing them does help current economic management. But it won't happen, "Krugman said in a column in The New York Times on Monday.
Krugman pointed out that considering that taxes only account for 20% -30% of the US GDP, which is much lower than other European countries, raising taxes is a more reasonable solution to reduce deficits.
But with the Republican Party controlling the US House of Representatives, tax increases are unlikely to happen soon. For months, policy makers in Congress have been debating spending issues, and the government narrowly avoided a shutdown in September. Republicans advocate for tax cuts and cuts in government spending.
The problem is very obvious. Conservatives always want to reduce taxes, especially for the wealthy, although opinion polls show that most Americans believe that the wealthy pay too little tax, "Krugman said. But I don't think there is any reasonable political way to significantly reduce the deficit through tax increases
Soaring interest rates make debt repayment costs higher
Krugman also pointed out that as interest rates rise, borrowing costs continue to soar.
He said that so far, there is no evidence that high interest rates will push the economy into recession, but it will indeed bring problems to the growing debt of the United States, which has reached $33 trillion for the first time this year.
Although Krugman believes that the United States will not face the risk of a fiscal crisis soon, higher interest rates mean that the cost of debt repayment for the United States will be higher. In 2022, the cost of the government repaying federal debt was $476 billion, accounting for approximately 2% of the country's GDP. Goldman Sachs strategists say that by 2030, this proportion may double to 4% of GDP.
Due to persistent inflation in the United States, it is unlikely that the Federal Reserve will lower interest rates in the short term. According to the CME FedWatch tool, the market expects an 83% probability that interest rates will remain at the current or higher level by June next year.