"Somebody has to spend more than their income, and, for the time being, that has to be the government," says Krugman.In reality, the last several years have shown that a debt crisis is easier to create than previously thought. Last year, S&P demonstrated to the world that the "good faith and credit" of the U.S. isn't iron-clad. The U.S. lost its AAA credit rating for the first time ever and faces the threat of additional downgrades. The reduction in rating increases Uncle Sam's cost of borrowing and makes it that much more difficult for Washington to get its fiscal house in order. This is significant because government debt becomes a drag on an economy after passing 90% of GDP, and it recently rocketed past 100%. A moribund economy further burdened by debt yields less revenue to the Uncle Sam, which makes it more difficult for Uncle Sam to pay his debt, which becomes even more difficult to pay back as borrowing expenses increase.
But what about the deficit, that so many people are concerned about? After all, Krugman was something of a deficit hawk during the Bush administration.
He notes two things: One is that the deficit spending under Bush was totally wasteful, and that that should have been time to pay down debts. But he also says he's learned from watching the US and Japan that it's much harder for a country to have a debt crisis than he previously appreciated.
"My thinking has evolved," says Krugman. "If you haven't updated your views in the face of new experiences, you're not doing your job."
The fact that the US has its own currency makes a big difference, as evidenced by the crisis in Europe, where the countries without their own currencies are getting into so much trouble.
He still thinks a debt crisis is theoretically possible, but the evidence of the last several years shows it's much harder than he realized.
And consider this: for the first time, debt-to-GDP has rocketed past 100% in a peacetime economy. Washington has already thrown the kitchen sink at the economy.