Debt: The Bad, the Weak and the Ugly
The prospect that the U.S. government will default on its payments because Republicans refuse to raise the debt ceiling is now real and imminent. In fact, bonds issued by some corporations are yielding less than Treasuries, indicating that investors now consider, say, Microsoft a more reliable debtor than the federal government.
As disaster looms, it’s important to keep in mind that Republicans are the villains here: They’re the ones engaged in extortion.
The reason I say this is that progressives are feeling a lot of rage against the Biden administration for refusing to take action to avoid this crisis. And at least some people in or close to the administration seem more dedicated to rejecting proposed ways out of the trap than they are to solving the problem. There’s a definite Stockholm syndrome vibe, in which the hostages seem angrier at their would-be rescuers than they are at their kidnappers.
So I hope that the administration will take what I say now as what it is — an attempt to be helpful.
There are at least three ways the administration could, in principle, bypass the debt ceiling. The objections to these options purport to be technocratic or legal, or both, but when you dig a bit you realize that they’re really political.
The first possible strategy is simply to ignore the debt limit, declaring it unconstitutional. The 14th Amendment, which says that the validity of U.S. debt “shall not be questioned,” has been getting a lot of attention. But more broadly, the debt ceiling impasse has put the administration in a position where it must break some laws — either the laws that specify federal spending or the law limiting government borrowing. In such a position, the president must choose which laws to obey; why should the debt ceiling take priority?
I’m not a lawyer, but I don’t find the case against the constitutional option persuasive. Some have said default wouldn’t violate the 14th Amendment, because the debt would still be valid — we just wouldn’t be honoring it. It’s also been argued that the merits of the case are largely irrelevant because of the Supreme Court’s partisanship. So it isn’t really about the law — it’s about the politics.
A second strategy would be to exploit a peculiar legal provision that allows the Treasury to mint platinum coins of any value it chooses. These coins could be deposited at the Federal Reserve, and the government could then draw cash from its account to continue paying its bills.
Contrary to what some people have asserted, this wouldn’t be inflationary — the Fed could and would offset any effect on the money supply by selling off some of its huge portfolio of U.S. bonds. And because selling those bonds would reduce the earnings the Fed remits to the Treasury, it would have the same fiscal impact as direct bond sales. Essentially, it would be normal borrowing through a back door.
A third option would be to issue perpetual bonds — bonds that pay interest forever but no principal, and hence have no face value. Since the ceiling is defined in terms of the face value of U.S. debt, not its fluctuating market value, it’s hard to see how the ceiling can apply. This isn’t a radical idea — it has a long history, especially in Britain, but has also been used in the United States.
Crucially, all these options are completely innocuous from an economic point of view, amounting to nothing more than workarounds that would allow the government to continue spending duly authorized by Congress.
The arguments against these options all boil down to political guesses. Maybe a partisan Supreme Court will reject the constitutional option. Maybe it will find some way to reject the seemingly clear language authorizing the coin, or the Fed will refuse to accept the coin if minted. Maybe the Supremes will come up with a novel definition of the debt limit (hard to see it, but who knows) that rules out perpetual bonds. Or maybe the Biden administration will be punished by voters if it is seen — or portrayed by the news media — as doing something unorthodox and shifty.
But these are only guesses. And remember, the Biden administration’s political judgment on the debt limit has been disastrously wrong every step of the way. Officials reportedly thought that by rejecting any workarounds, they would get centrists and business groups to intervene and force Republicans to raise the ceiling. It didn’t happen. They ignored warnings that insisting that there were no options would just embolden G.O.P. extremists; it did.
My guess is that if push comes to shove, even a partisan Supreme Court won’t be willing either to burn down the world economy or to order President Biden to break the law by disregarding existing spending legislation. Yes, that’s a risky bet — and unorthodox actions might still leave markets nervous. But there are no riskless options at this point.
Realistically, given the administration’s obduracy so far, I don’t expect it to take any of these actions until or unless the debt limit has actually been breached and the crisis is fully upon us. But I hope someone inside the Treasury is quietly preparing to do whatever it takes. If not, God help us all.
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Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman