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The Biden administration should ignore the debt ceiling

Summary:
The administration run excessive budget deficits, and accumulated too much debt in the face of successive economic crises. As a result, it was forced to compromise politically in order to avoid a catastrophic default, and the subsequent political crisis brought about chaos, and the collapse of the established institutions. Of course, this is not a cautionary tale about the United States. It is a description of the economic crisis that led to the French Revolution.But in spite of the apocalyptical rhetoric in Washington nothing like this is even faintly possible in the case of the United States. Public debt in the US is in domestic currency, the safest financial asset, and not owed to foreign bankers or in foreign currency, which is not controlled by the administration. It is also not debt

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The Biden administration should ignore the debt ceiling

The administration run excessive budget deficits, and accumulated too much debt in the face of successive economic crises. As a result, it was forced to compromise politically in order to avoid a catastrophic default, and the subsequent political crisis brought about chaos, and the collapse of the established institutions. Of course, this is not a cautionary tale about the United States. It is a description of the economic crisis that led to the French Revolution.

But in spite of the apocalyptical rhetoric in Washington nothing like this is even faintly possible in the case of the United States. Public debt in the US is in domestic currency, the safest financial asset, and not owed to foreign bankers or in foreign currency, which is not controlled by the administration. It is also not debt in an asset the administration does not control like gold, as it was the case in Ancien Régime France, or the US itself before the end of Bretton Woods. More importantly, political representation, and democratic control over the public purse provided the conditions to sustain expanding budgets and public debt in the American case. The debt reflects, for good or for bad, the democratic decisions of the people. The only reason public debt has become an issue is the existence, for arcane political reasons, of a debt ceiling.

Even though there is a debate about whether the economy needs an additional fiscal boost or not, nobody thinks seriously that the disruption caused by a default and interruption of government functions, with a shutdown, would be a good idea, particularly not during a pandemic. The economy is certainly not a full employment, and about five million workers that had jobs before the pandemic are unemployed. Inflation, although a concern, does not result from an economy close to full employment, but from the disruptions associated with the supply chain during the pandemic. Interest rates on public debt remain low, and there is no reason for austerity measures in the midst of a still uncertain recovery. In fact, most economists, and a good part of the public opinion, think that the visible decline in American economy results from lack of investment, not just on basic infrastructure, but also on the wellbeing of population. 

If there is a perception of a national crisis, it is not about a fiscal one, but one about declining hegemonic power, and about the rise of China (with the Sinophobic undertones noted by Tom Palley). The solution requires investment in the future, in the kinds of things that are both popular and part of the broader Biden agenda, boosting the safety net programs, and investing in green technologies, promoting cleaner economic growth. That these investments are necessary is not particularly controversial, given the size of the social crisis at home, and the global environmental crisis, let alone in the context of a pandemic crisis that seems will become endemic.*

The debt ceiling debate is purely a political instrument used by Republicans to preclude Democrats from implementing their budgetary priorities. This is not an economic crisis, it is a political crisis and requires a political solution. The most cited solution for the current crisis would be to mint a one trillion-dollar platinum coin, that would allow the Treasury to continue spending (e.g. Paul Krugman here). As Zachary Carter said in the Washington Post, only an absurd solution could save the US from an absurd problem. However, trust in the existent political institutions might be the best solution for the impasse. The Biden administration should simply declare that the debt ceiling is unconstitutional, move forward, and continue to make payments even if the debt ceiling is breached. Congress cannot enforce the debt ceiling, and the Treasury can continue to pay until the courts decide on the merits of the case. The issue should be decided by the courts.


There are two possible objections to this strategy. The first one is that an impasse may imply that the US would be technically in default, and that chaos would ensue. However, if the Treasury continues to pay, the worst consequences could be averted. As noted, everybody knows this is a political problem and there is no real question that the US cannot pay. The other concern is that the Supreme Court could presumably determine that the debt ceiling is constitutional after all. That is, to be clear, a possibility. However, it should also be clear that the Roberts court is strongly probusiness and that financial and corporate interests in general are against a default that would hurt the economy. But in the case the court decides to commit economic suicide for no good technical reason, this might still be the right move. Perhaps then there would be enough support to eliminate the debt ceiling through the legislative process, eliminating the filibuster.

* There is, of course, some debate within the Democratic Party, with Senators Manchin and Sinema probably precluding a larger fiscal package.
Matias Vernengo
Econ Prof at @BucknellU Co-editor of ROKE & Co-Editor in Chief of the New Palgrave Dictionary of Economics

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