How bad will it be if we don’t manage to raise the debt ceiling in the United States? And what should President Obama’s negotiating strategy be? A few thoughts.
The direct effects of hitting the ceiling would be bad enough — sharp cutbacks in spending, which would undermine essential services, not to mention derail the economy. It’s not clear to me whether there would be some wiggle room through the accumulation of arrears — say, not actually paying workers and contractors, but promising to make it up when sanity returns. But it would be ugly indeed.
What might make it even worse would be indirect effects, of two kinds.
First, government debt plays a special role in the American financial system: Treasury bills are the universal safe asset, the ultimate collateral. That’s why, during moments of financial stress, the interest rate on T-bills has actually gone negative. Make that safe asset suddenly unsafe, and it might cause vast disruption.
Second — and I don’t think this is getting enough attention — failure to raise the debt limit could act as a terrible signal about the American political system.
When you look at the United States’ fiscal position in terms of what we’re capable of as a nation, it’s not a big problem. Never mind those big numbers you hear about implicit liabilities; we have a big economy, too. So modest tax increases and reasonable efforts to limit health-care costs could bring our long-run finances into line.
Click here to get Truthout stories like this one sent straight to your inbox, 365 days a year.
But all this depends on our having the political will and cohesion to do what’s necessary. What if it turns out that we’re a banana republic, with crazy extremists having so much blocking power that we can’t get our house in order?
And failing to raise the debt limit could be widely read as a signal that we are, in fact, a banana republic. In that case, however, what should Mr. Obama do? My answer is that he must not let himself be blackmailed.
Partly that’s because once he gives in the first time, the blackmail will never stop. Once the crazies know that they can get whatever they want by threatening to blow up the economy, they’ll just keep demanding more and more. Mr. Obama can’t let that dynamic get started without setting up an even worse crash down the road.
Plus, the conservatives on the far right may claim that they’re worried about deficits, but they’re actually deeply fiscally irresponsible. Realistically, the budget-deficit plan conceived by Republican Representative Paul D. Ryan would sharply increase the deficit — because its spending cuts are in many cases impossible, and its supposed revenue neutrality is a sham. So giving in to the right would be just as much a signal of banana-republic-hood as a temporary default.
This is going to be very ugly. But I don’t think there’s any way to avoid taking it all the way to the edge, and possibly over it.
Truthout has licensed this content. It may not be reproduced by any other source and is not covered by our Creative Commons license.
Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.
Truthout Is Preparing to Meet Trump’s Agenda With Resistance at Every Turn
Dear Truthout Community,
If you feel rage, despondency, confusion and deep fear today, you are not alone. We’re feeling it too. We are heartsick. Facing down Trump’s fascist agenda, we are desperately worried about the most vulnerable people among us, including our loved ones and everyone in the Truthout community, and our minds are racing a million miles a minute to try to map out all that needs to be done.
We must give ourselves space to grieve and feel our fear, feel our rage, and keep in the forefront of our mind the stark truth that millions of real human lives are on the line. And simultaneously, we’ve got to get to work, take stock of our resources, and prepare to throw ourselves full force into the movement.
Journalism is a linchpin of that movement. Even as we are reeling, we’re summoning up all the energy we can to face down what’s coming, because we know that one of the sharpest weapons against fascism is publishing the truth.
There are many terrifying planks to the Trump agenda, and we plan to devote ourselves to reporting thoroughly on each one and, crucially, covering the movements resisting them. We also recognize that Trump is a dire threat to journalism itself, and that we must take this seriously from the outset.
After the election, the four of us sat down to have some hard but necessary conversations about Truthout under a Trump presidency. How would we defend our publication from an avalanche of far right lawsuits that seek to bankrupt us? How would we keep our reporters safe if they need to cover outbreaks of political violence, or if they are targeted by authorities? How will we urgently produce the practical analysis, tools and movement coverage that you need right now — breaking through our normal routines to meet a terrifying moment in ways that best serve you?
It will be a tough, scary four years to produce social justice-driven journalism. We need to deliver news, strategy, liberatory ideas, tools and movement-sparking solutions with a force that we never have had to before. And at the same time, we desperately need to protect our ability to do so.
We know this is such a painful moment and donations may understandably be the last thing on your mind. But we must ask for your support, which is needed in a new and urgent way.
We promise we will kick into an even higher gear to give you truthful news that cuts against the disinformation and vitriol and hate and violence. We promise to publish analyses that will serve the needs of the movements we all rely on to survive the next four years, and even build for the future. We promise to be responsive, to recognize you as members of our community with a vital stake and voice in this work.
Please dig deep if you can, but a donation of any amount will be a truly meaningful and tangible action in this cataclysmic historical moment.
We’re with you. Let’s do all we can to move forward together.
With love, rage, and solidarity,
Maya, Negin, Saima, and Ziggy