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By Paul Krugman
A few days ago I received an automated text from my bank. For some reason the bank’s algorithm flagged a valid charge on my debit card as potentially questionable; the text asked me to verify the purchase.
In a rational world raising the federal debt limit would be regarded as the equivalent of typing “1” in response to that text — acknowledging a purchase that you have already made.
No, raising the debt limit doesn’t give the president free rein to spend whatever he wants. It simply allows the government to honor its promises, which include everything from paying interest on its debt to sending checks to Social Security recipients. These promises, duly authorized by Congress, exceed the expected amount of taxes and other revenue, so they must be met in part through borrowing; but that’s normal operating procedure, and financial markets are happy to lend us the money.
Unfortunately, a quirk in the U.S. budget process requires Congress, having enacted budget legislation, to vote again to authorize the Treasury to raise the funds needed to follow the law. And Republicans — who had no problem with large-scale borrowing when Donald Trump was in the White House — are now getting ready to weaponize that quirk.
We officially hit the debt limit this week, but accounting maneuvers can postpone a crisis for several months. But what happens when those maneuvers are exhausted? The operations of the U.S. government will be disrupted — Republicans’ claims they have a way to “prioritize” payments, honoring some promises but not others, in ways that limit the damage are almost surely nonsense. Even if, say, interest payments can be maintained, we would leave everyone, from investors to vendors, wondering whether America can’t be trusted to pay its bills.
Furthermore, U.S. debt plays a special role in world markets, which treat federal obligations as the ultimate safe asset, collateral for many transactions. If investors lose confidence that the U.S. Treasury will honor its promises, there could be a global financial meltdown (which almost happened in March 2020, when markets, rattled by Covid-19, made a rush for cash).
A debt crisis, then, would be bad and possibly catastrophic. So should Democrats give in to Republican demands?
No. A party that barely controls one house of Congress shouldn’t get to impose deeply unpopular policies on the nation as a whole.
And it’s not even clear that the Biden administration could surrender if it wanted to. The current crop of House Republicans makes the Tea Party, which (alas) used the debt limit to blackmail President Barack Obama, look reasonable. Today’s G.O.P. doesn’t even seem to have a coherent set of demands; a significant number of caucus members may well want a crisis, preferring to “watch the world burn” under a Democratic administration.
What, then, are the alternatives? I see three major possible routes.
First, while it remains baffling that Democrats didn’t raise the debt limit while they still controlled Congress, there could yet be a legislative solution: Democrats could seek a “discharge petition” to force a vote on raising the debt limit despite opposition from G.O.P. leaders. This would both take time and require support from a handful of sane Republican House members. But it’s surely worth trying.
Second, it’s probably possible to use financial engineering to bypass the debt limit. The most famous proposal calls for minting a platinum coin with a face value of, say, $1 trillion, depositing that coin with the Federal Reserve and spending out of the bank account thus created. Believe it or not, this would almost certainly be legal.
Another option would involve raising money by issuing “premium bonds” when existing debts come due — bonds whose face value is the same as that of the bonds they replace, so that they don’t officially increase the debt, but offer high interest rates, so they sell for much more than their notional value.
These would, of course, be financial gimmicks. So? If it takes gimmickry to frustrate the schemes of destructive extremists empowered by a legal quirk, and thereby avoid financial catastrophe, so be it.
Finally, there are a couple of what I think of as constitutional options. The 14th Amendment to the Constitution says that the validity of public debt “shall not be questioned,” which might be construed as a reason to ignore the debt ceiling rather than default on payments.
Alternatively, it seems fair to say that the White House is facing incompatible demands. Congress has, through duly enacted legislation, specified levels of federal spending and taxes; but one house of Congress appears poised to tell the president that he can’t raise the money he needs to obey the previous legislation. Since it seems that President Biden can’t avoid breaking at least some laws if the debt ceiling isn’t raised, ignoring the debt ceiling may be the “least unconstitutional” option.
Which option should Democrats pursue? I’d say all of them. Above all, this is no time for officials to worry about seeming silly or undignified. The Biden administration is facing the threat of economic terrorism — that sounds extreme, but it’s basically what creating an artificial debt crisis amounts to. And it should do whatever it takes to face down that threat.
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