Why Paul Krugman Called The Debt Ceiling Wrong

Paul Krugman

Photo: ABC

The big news in the debt ceiling world is that the GOP basically folded on Friday.The story isn’t over yet (things can always go wrong) but the party offered to hike the debt ceiling for three months, so that it would come up after the sequester (automatic spending cuts) and continuing resolution (the budget) debates were dealt with.

Even though this is just a 3-month hike, this is basically a total fold on debt ceiling brinksmanship, since the real battles will come before it, and they’re not going to come up with a deal on the sequester and the budget, without also coming to a deal on the debt ceiling.

In a blog post, Paul Krugman admits he called it wrong.

When you’re wrong, you’re wrong. I thought that by ruling out any way to bypass the debt limit, the White House was setting itself up, at least potentially, for an ignominious cave-in. But it appears that the strategy has worked, and it’s the Republicans giving up. I’m happy to concede that the president and team called this one right.

Paul Krugman has been pretty spot on with respect to politics, and the tactics taken by Republicans, so why did he call this wrong? And what does it mean?

Dave Weigel at Slate has a great report on the 3-day retreat that the House Republicans went on last week that’s very illuminating about where the mind of the GOP is:

According to participants in the three-day retreat, the party’s first real all-hands meeting since the election had a resigned, realistic tone. Members were assigned to read articles like Ramesh Ponnuru’s post-election wrap, “The Party’s Problem.” Ponnuru had debunked a warm-blanket Republican theory that Mitt Romney’s cartoonish elitism had cost them the election. “Romney was not a drag on the Republican party,” wrote Ponnuru. “The Republican party was a drag on him.”

As the discussion veered into “messaging,” guests and nonessential staffers were asked to leave the room. Ryan strolled over to the media room, where he said members were being educated on “the consequences of all the deadlines that are coming.”

“We have to recognise the realities of divided government that we have,” he said. “We’re discussing the possible virtue of a short-term debt limit extension so we have a better chance of getting the Senate and the White House involved in discussions in March.”

In other words, this week the GOP came to grips with the fact that Kamikaze spending and debt strategies don’t play well in the real world. Washington’s ice age is thawing out.

The fact that Tea Party approval has fallen to a record low in the short history of the movement also furthers the cause of Washington starting to function with some semblance of normalcy.

Nomura economist Lewis Alexander — who has generally been on the more pessimistic side of the fiscal questions lately — wrote on Friday

[The] announcement does suggest that policymakers are being somewhat more proactive than they have been in the recent past. That may suggest that the process of resolving the uncertainty over the course of fiscal policy will be less disruptive than previously expected.

Bottom line: It looks likely that Washington is over the hump, and has passed peak dysfunction.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.