Preparing for Republican Debt Blackmail

By Paul Krugman of The New York Times

No one knows for sure what will happen in the midterm elections. But if Republicans take one or both houses of Congress, the most important question will be the one that gets almost no public attention: what will the Biden administration do when the GOP threatens to blow up the global economy by refusing to raise the debt ceiling?

In particular, will Democrats be prepared to take the extraordinary measures the situation will demand, doing whatever it takes to avoid being blackmailed?

Notice I said “when”, not “if”. After Republicans took over the House in 2010, they quickly weaponized the debt ceiling against the Obama administration, using it to extract spending cuts they could not have obtained through normal legislative means. And it was a pre-MAGA GOP, which for the most part didn’t deny the legitimacy of the president or make excuses for violent insurgencies.

In fact, I wonder if the Republicans will even seriously try to get concessions this time around, instead of creating chaos for themselves.

Notice also that I said “blow up the global economy”, not just cripple the US government. The consequences of forcing a default on the federal debt, which a refusal to raise the limit would do, would extend far beyond the operations of the federal government itself.

Let’s step back and talk about why all of this is a problem. American law, for historical reasons, requires Congress to vote the budget twice. First, senators and representatives enact laws that set tax rates and authorize spending. This law ultimately determines the federal budget balance. But if we end up running a deficit, Congress has to vote a second time, to authorize borrowing to cover that deficit.

It is not clear that this procedure ever made sense. In any case, in modern times, the debt ceiling allows for loose postures: politicians can claim budgetary responsibility, refusing to vote for a higher debt ceiling, without specifying “how” the budget must be balanced.

And no, “We should eliminate unnecessary spending” is not an honest answer. The federal government is essentially a giant insurance company with an army: spending is dominated by Social Security, Medicare, Medicaid, and the military, and voters want to keep all of those programs going. Surely there is waste in government, as there is in any large organization, but even if we could somehow make that waste go away, it wouldn’t do much. to reduce the deficit.

Someone who is seriously worried about the deficit might call for a tax hike. After all, the US tax burden is low compared to other rich countries. But the Republicans will not go there.

Where will they go? There is plenty of evidence that Republicans will try, if they can, to use the debt ceiling to extort deep cuts to Social Security and Medicare. They probably couldn’t pass such cuts — which would be deeply unpopular — through the normal legislative process, and they certainly wouldn’t have enough votes to override a Biden veto. But the idea would be to coerce Democrats into complicity, so the public doesn’t realize who is responsible for the pain.

And that’s the best case scenario. As I said, the GOP is much more radical now than it was over a decade ago, and it may well be less interested in achieving political goals than in blowing up the global economy. under the supervision of a Democratic president.

Why would refusing to raise the debt ceiling cause the economy to explode? In the modern world, US debt plays a crucial role: it is the ultimate safe asset, easily convertible into cash, and there are no good alternatives. If investors lose faith that the US government will honor its obligations, the resulting financial storm will make the recent chaos in Britain look like a passing shower.

So what should be done to ward off this threat? If Republicans take control of one or both chambers in November, Democrats should use the lame session to enact a very large increase in the debt ceiling, enough to freeze the issue for years. Republicans and pundits who don’t understand the stakes would furiously attack this decision, but it would be far better than allowing extortion – and would likely be forgotten by the time of the 2024 election.

If for some reason Democrats don’t take this obvious step, the Biden administration should be prepared to turn to legal strategies to circumvent the debt ceiling. There appear to be several loopholes the administration could exploit – the minting of trillion-dollar platinum coins is the most famous, but there are others, such as the issuance of undated bonds of maturity and therefore without nominal value.

The Obama administration was unwilling to take any of these routes, I think largely because they thought they would look fanciful and undignified, and they preferred to seek a compromise. But Democrats surely don’t have to worry about dignity when the other party is led by Donald Trump. And anyway, they now face not only radical but also anti-democratic opponents; no real compromise is possible.

Of course, none of this will be relevant if the Democrats hold Congress. But they have to prepare for the worst.

Jerry B. Hatch