[The Soup Nazi]

Sorry for Krugmanizing this thread, but this is another good 'un:

Biden versus the chaos caucus

A few ways to get out of this debt ceiling mess

By Paul Krugman
Opinion Columnist

Let’s say you took out a large mortgage to buy a house. Maybe you made the right decision, maybe you didn’t. Either way, you signed the contract. And your next monthly payment on that mortgage is due.

So how do you respond? Do you (a.) grumble but pay the bill, since that’s what you promised to do? Or do you (b.) refuse to pay, giving a speech about how debt is bad and your family must cut spending, even though defaulting on your mortgage will ruin your credit rating and could cause you to lose your house?

On Monday, Kevin McCarthy, speaker of the House, decided to go for option (b.). Or maybe “decided” is the wrong word. McCarthy may be the weakest speaker in modern history, the notional leader of a caucus seemingly united by little but its loathing for President Biden, probably including a number of members who would rather see the U.S. economy burn than allow Biden to govern successfully. It’s not even clear that McCarthy could deliver on the dead-on-arrival, vague sketch of a deal he sort of offered in a speech at the New York Stock Exchange.

The issue at hand is whether to raise the federal debt ceiling. This ceiling is a peculiar — and destructive — quirk of the U.S. budget process. Here’s how it works: First, Congress passes legislation that determines federal spending and tax collection. This legislation may lead to a budget deficit. Whether that’s a good idea is beside the point: Congress made its choices, and the Treasury Department must do whatever is necessary to honor duly enacted legislation, which may require borrowing to cover the deficit.

But under current law Congress must also vote a second time to authorize federal borrowing by raising the limit on the allowed amount of debt. And we’re only a few months from the point where America won’t be able to keep paying its bills — that is, spend the money Congress has already told it to spend — unless Congress votes to raise that limit.

Yet now House Republicans aren’t willing to raise the limit unless they are given policy concessions they would never be able to enact via the normal legislative process. Basically, they’re saying, “Nice economy you have here. It would be a shame if something happened to it.”

Indeed, failing to raise the debt limit would have disastrous consequences, laid out in a useful recent paper from Moody’s Analytics titled “Going Down the Debt Limit Rabbit Hole.” At minimum, it would disrupt the functioning of the federal government. At worst, it would precipitate a global financial crisis, possibly as bad or worse than the crisis of 2008 — because U.S. government debt, normally considered the ultimate safe asset, is the linchpin of financial markets around the world, and many markets might freeze if investors lose confidence that we’ll honor that debt.

What can be done to avoid this potential disaster? McCarthy’s suggestions about what a deal might involve are barely worth discussing. On one side, giving in to blackmail — for that’s what a deal would amount to — would set a terrible precedent. On the other, it’s not clear that McCarthy could make good on a deal even if the Biden administration were willing to go along.

Still, for what it’s worth, McCarthy seems fixated on the idea that many Americans are refusing to work because they’re living off government aid and that we should impose more stringent work requirements on programs like food stamps and Medicaid. In reality, the employed percentage of Americans in their prime working years is near a 20-year high. And furthermore, there is abundant evidence that work requirements don’t actually encourage work — all they do is throw up bureaucratic hurdles that end up denying aid to people who really need it.

But this is, as I said, beside the point. What will actually happen next?

One possibility is that faced with looming financial chaos, McCarthy will allow a floor vote on the debt ceiling, and that a few sane members of his party will cross the aisle and help Democrats raise the ceiling. As far as I can tell, that’s the Biden administration’s plan A.

What about plan B? There are several options. Moody’s Analytics seems to think that the Biden administration might simply ignore the debt limit, invoking the 14th Amendment to the Constitution, which says that the validity of U.S. public debt “shall not be questioned.”

Another possibility is the famous platinum coin. U.S. law allows the federal government to issue commemorative platinum coins in any denomination it chooses; so it could in principle mint a coin notionally worth, say, $3 trillion, deposit it at the Federal Reserve and pay its bills by drawing down the account thereby created. (The Fed would offset any effect on the money supply by selling off some of its large portfolio of U.S. government bonds, so this would in effect simply be borrowing through the back door.)

Yet another possibility would be to issue “premium bonds.” These are bonds that offer an unusually large “coupon,” i.e., annual interest payment, relative to their principal, the amount they pay when they come due. The Treasury could auction off these bonds for substantially more than their face value, in effect borrowing without increasing the official size of the debt.

All of these plans have drawbacks, and considered in isolation they each sound a bit silly. But they should be graded on a curve — compared not with normal fiscal management, but with the catastrophic consequences if the U.S. government simply stops paying its bills.

One thing should be clear: It’s unlikely that this situation will be resolved with something resembling the deal that ended the debt ceiling crisis of 2011. Democrats have gotten somewhat tougher: They believe that President Barack Obama gave in to blackmail, and they won’t do it again. Republicans, on the other hand, have gotten a lot crazier; even if Democrats were willing to make a deal, it’s highly doubtful that McCarthy could persuade his caucus to accept it.

I wish I could offer reassurance that all of this will work out. But I can’t. When the party that controls one body of Congress has no interest in keeping America governable, catastrophe is always a real possibility.


Quick Hits

More about premium bonds.

Why not consols (perpetual bonds whose principal is never repaid)?

Debt in a very long perspective.

Debt is high. Interest payments, not so much.