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By Paul Krugman
The United States is barreling toward a debt crisis; the possibility of default on U.S. debt is already beginning to roil markets.
What’s odd about this potential crisis is that it has nothing to do with excessive debt. Maybe you think the federal government has borrowed too much over time. We can argue about such things. But they’re beside the point right now. America in 2023 isn’t like, say, Greece in 2009 or Argentina in 2001, cut off by investors because they have lost faith in our solvency.
Our looming crisis will, instead, be entirely self-inflicted — or, more accurately, Republican-inflicted. If it happens it will be because the party controlling the House refuses to raise the debt ceiling, a quirk of the U.S. budget process that lets Congress prevent the government from making payments that have already been approved through past legislation.
There are three things you need to know about this crisis.
First, whatever courts may say about the constitutionality of the debt ceiling, budget decisions should be dictated by votes over spending and taxing, not by hostage-taking in which the party most willing to destroy the economy gets what it wants.
Second, if the politics of extortion do lead to a debt default, the consequences will be catastrophic.
Third, there is no economic downside to the various ways the Biden administration might seek to bypass Republican extortion and continue normal governance. Contrary to a lot of misinformation out there, things like issuing premium bonds or minting a platinum coin would not be inflationary. They sound undignified, but creating a global depression because we’re afraid of looking silly would be utterly irresponsible.
Here’s how budgeting is supposed to work: Congress passes bills that set tax rates and determine spending, which become law if the president signs them. Much of the time the legislated spending exceeds revenue, so the government must borrow to cover the difference. So be it. But under a quirk of U.S. law, with complicated origins, Congress must vote a second time to authorize the borrowing required by its own previous votes.
What would it mean if Congress refused to authorize that borrowing, that is, refused to raise the debt ceiling? It wouldn’t be a way to restrain spending. It would, instead, amount to preventing the president from making payments Congress has already mandated. It would be like buying a bunch of home furnishings, taking delivery, then refusing to pay the bill.
And it would be hugely destructive.
A new report from the White House Council of Economic Advisers lays out potential costs from a default induced by Republican refusal to raise the debt ceiling. The analysis suggests that a protracted default could cost eight million jobs as a result of shocks to consumer and business confidence, increased interest rates on U.S. debt (which investors would no longer consider safe) and drastic forced cuts in government spending.
Even these projections may understate the likely damage. Until now, the world has viewed U.S. government debt as the ultimate safe asset; as a result, Treasury bills play a crucial role as collateral in many financial transactions. Make these bills unsafe — I.O.U.s that the U.S. may not honor — and the whole global financial system could freeze up.
In fact, this almost happened for a few days in March 2020, and it’s not clear whether a rescue could be engineered in today’s political environment.
So what can be done? Let’s not make a deal: Republicans are effectively engaged in a fiscal version of Jan. 6, using the threat of destruction in an attempt to exert total control even though voters gave them only one house of Congress. President Biden shouldn’t give in to extortion, let alone make any deal acquiescing to demands of the extremists who control the House G.O.P.
It’s possible that Biden could simply declare that he must implement duly enacted fiscal legislation and that a debt ceiling that prevents him from doing so is unconstitutional.
Beyond that, there are those gimmicks. Yes, they would be gimmicks. I don’t have space to explain premium bonds, but they would involve playing games with the definition of “debt.” As for the platinum coin, the law allowing the government to mint a trillion-dollar coin was never intended as a way to bypass debt-limit extortion — but the debt limit was never intended to provide a mechanism for extortion, either.
And there are no significant economic downsides to using these gimmicks. I’ve been shocked to see people who should know better, including mainstream media outlets, report as fact the myth that, say, minting the coin would be inflationary. It wouldn’t; it would simply be a backdoor way to continue normal financing, bypassing the letter of a debt ceiling that shouldn’t exist in the first place.
I’m not sure what specific approach the Biden administration will adopt. But the guiding rule should be to do whatever it takes to get through this — whatever it takes, that is, other than giving in to extortion.
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