Monday, January 7, 2013

Paul Krugman, the Debt Limit, and Platinum Coins

Paul Krugman is advocating that the Administration mint a $1 trillion coin and deposit it at the Fed if necessary in order to continue to make payments and not default on the debt due to a lack of borrowing authority because of Congressional refusal to increase the debt limit in a timely manner. 
At the end of his post, Krugman mentions the 14th Amendment to the U.S. Constitution, which states in Section 4:  “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”  The Administration says that this does not let it “ignore” the debt limit statute, but I might note that this formulation is somewhat ambiguous, since arguing that the 14th Amendment overrides the debt limit statute in an extreme situation is not the same as “ignoring” the debt limit statute.  Nevertheless, there are legal scholars, including Laurence Tribe, who argue that the 14th Amendment does not permit the Treasury to issue debt in excess of the statutory limit. Therefore, Krugman writes: “So if the 14th amendment solution — simply declaring that the debt ceiling is unconstitutional — isn’t workable, go with the coin.” 

I have no idea what the Administration’s legal analysis is of the platinum coin option.  Of course, on its face, issuing a trillion dollar coin seems ridiculous, but it would also be ridiculous for the Congress and the Administration to have reached such an impasse that the choice facing the Administration was to resort to a platinum coin or some other ridiculous gimmick or default on the debt.  And, I suppose, one could argue that the 14th Amendment justified the Administration using a gimmick such as a platinum coin to avoid default, even if the Amendment cannot be construed to allow Treasury to issue debt in excess of the debt limit. 
Of course, no one outside the Treasury, the White House, and perhaps the Justice Department (and an extremely small group at those places) can know what the Administration thinks it might do if its back was up against the wall because of the debt limit.  Any Administration wants to avoid ever being in the position of having to make the choice of using something like the platinum coin option or defaulting. Fortunately, while Treasury has used gimmicks that are now widely known as "extraordinary measures," it has never been the case that the Administration and the Treasury had to refer to the 14th Amendment, resort to a gimmick as silly as issuing a platinum coin, choose which law to break because of the impossibility of not violating some law because of the debt limit, or default on an interest or principal payment. And, as extreme as some House Republican are, I don't think it will come to that. This is a giant bluffing game, and the mention of platinum coins is part of this game, even if it is not coming from the Administration.

In a few weeks, we'll see how far each side wants to go in this game of chicken in the coming fight over increasing the debt limit. I believe Newt Gingrich is right, this is a "dead loser" for the Republicans. Market participants, whatever their ideology, will loudly warn of the dangers of defaulting, and foreign countries, such as China, will also be watching nervously. It is hard to see how, at the end of the day, the Republicans cannot let a debt limit bill pass at the last minute, whether or not they have gotten what they want from the Administration. From the Republican/deficit hawk point of view, a better political strategy would be to threaten a partial government shutdown through the use of appropriation bills and the sequestration provisions of current law. (Republicans do have to worry about the sequestration of some defense expenditures, which some worry about a lot.)

Incidentally, it keeps getting repeated that 2011 was the first time Congress ever tried using the debt limit for political purposes. E.J. Dionne recently repeated that in the Washington Post. It's not true, as a look at the record would quickly indicate.  (I have written on this briefly here and here.)

Note: I should note that, while I worked at Treasury, I was never part of the group of people who made decisions involving the debt limit nor did I ever know what the Administration was prepared to do if Congress had failed to increase the limit in time.

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