Photo: AP Images
Nobel Prize-winning economist Paul Krugman addresses the debt-ceiling standoff and “trillion-dollar coin” squarely in his New York Times column today.
Krugman makes a number of key points that are often ignored as both sides try to shout each other down:
- The bills that need to be paid through the government’s borrowing more money (after raising the debt ceiling) have already been approved by Congress. If House Republicans refuse to raise the debt ceiling, therefore, they will be reneging on paying bills that Congress has already approved. (Imagine if a business did that: Promised to pay, had the capacity to pay, and then just refused to pay because a minority owner didn’t want to.)
- Even if Congress raises the debt ceiling, President Obama will not have any new spending power. Specifically, he will not be able to spend any money that Congress has not already told him to spend.
- If Congress does not raise the debt ceiling, President Obama might be forced to break a law no matter what. He might either break the law by not paying bills that Congress has asked him to pay, or he might break it by borrowing more money even though Congress hasn’t raised the debt ceiling.
- The “default” threat is reckless and destructive. If the country actually defaulted, which it has never done, the financial markets might collapse. And the economy would likely take a big hit. Importantly, this would hurt Republicans and Democrats alike.
- The Republicans are approaching this negotiation like suicide bombers. As Krugman puts it: “Republicans go wild at this analogy, but it’s unavoidable. This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met.”
- The “trillion-dollar coin” sounds like a joke–and, at one level, it is. But it has become an important negotiating chit now that one political party is threatening to hold the country hostage by behaving like suicide bombers.
It’s worth adding one point…
Some more reasonable-sounding Republicans, like Senator Rand Paul, are now advocating an approach that won’t cause the country to default…on its bonds. Paul wants to introduce legislation that would force the government to pay bondholders, the military, and Social Security checks–but immediately cut spending on everything else. This, Paul says, would balance the budget overnight.
This approach sounds more reasonable.
But as I explained here, by suddenly cutting $1.1 trillion of spending, it would immediately shrink the economy by 7%.
Hundreds of thousands of government workers and contractors would be thrown out of work.
Businesses that benefit from government spending and the spending of these government employees would get whacked.
These businesses would have to lay off people.
And so on.
And, importantly, because so many people would lose their jobs, the government’s tax revenue would quickly drop, thus forcing additional cuts. This is the “austerity” trap that has buried Greece and other countries in Europe.
So, although it sounds more reasonable, this approach would be devastating to the economy and country.
The bottom line is this.
The Republican Party of my parents–the party of fiscal prudence and conservatism–appears to be an ancient memory.
The current Republican Party is neither fiscally prudent nor economically literate.
Rather, it is a party controlled by extremists who either don’t understand how the economy works or, worse, don’t care.
It’s no wonder, therefore, that so many reasonable Americans are coming to realise that Obama may have no choice but to “mint the coin.“
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