Baltimore Sun

Do whatever it takes on debt ceiling, except give in

- Paul Krugman not Krugman is a columnist for The New York Times.

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 such as issuing premium bonds or minting a platinum coin would 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 and 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 8 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 — IOUs 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, 2021, using the threat of destructio­n in an attempt to exert total control even though voters gave them only one house of Congress. President

Joe Biden shouldn’t give in to extortion, let alone make any deal acquiescin­g to demands of the extremists who control the House GOP.

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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