Tuesday, January 15, 2013

The Normally Unflappable Paul Krugman is Flapped About the Debt Ceiling and a Platinum Coin

Missing the Easy Way Out of a New Debt Ceiling Debacle

[Update:   The President now says he will do exactly what this Forum advocates for him to do.  So why publish this Post?  Well let's just say that skepticism abounds here and leave it nicely at that.]

The Congress must pass a law increasing the debt ceiling or else the U. S. government . . . , well we really don’t know what happens.  But obviously if the U. S. government cannot borrow to pay back the money it owes as it comes due and to fund operations that is not a good thing.

All sorts of normally sane and rational serious people have been coming up with various schemes to circumvent the issue.  Over at Dorf on Law, a really good Forum for example they are advocating just ignoring the law and claiming a Constitutional right to issue debt above the ceiling limit, something that even if it were legal is a political catastrophe.

Paul Krugman, the Nobel Prize winning economist who blogs for the New York Times and who is the platinum standard on economics and policy wants the U. S. to issue a platinum coin, and sell it to the Fed in return for money from the Fed to fund the government.  This has now been ruled out, thank you very much, by the Treasury and Mr. Krugman is not happy.

The thing is, the coin option sounds silly, but it clearly obeys the letter of the law. As far as I can tell, none of the other options — other than outright surrender — has the same virtue. Failing to pay debt service would be a breach of contract. Paying contractors, and maybe Social Security recipients, in scrip would violate the law, which says that they should be paid — not given IOUs. Deciding that the president has the right to ignore the debt limit after all would avoid these legal breaches at the expense of another breach.

What Mr. Krugman and all the others are missing here is an application of Occam’s Razor, that the simplest and most obvious solution in the right one.  In this case the solution is for Mr. Obama to simply announce he will accept only a straight forward increase in the debt ceiling with no policy applications attached, and that if he does not get this he will allow the U. S. to default and suffer the consequences.

The Republicans may well call his bluff, but if he simply holds his ground about 15 minutes later the entire world business, finance and economic establishment will descend in fury upon the Republicans, who will be forced to pass a clean debt ceiling bill.  Yes there may be a period of disruption and other issues, but this is the only way to fix this problem once and for all.

Really Mr. Obama and Mr. Krugman and the others, that is all it will take.

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