Paul Krugman Warns Of 'Disastrous Consequences' If Debt Ceiling Isn't Raised, Offers Options Government Should Take

In an op-ed for the New York Times on Tuesday, Paul Krugman, a Nobel laureate in economics, offered his take on the U.S.' debt crisis. 

Disastrous Consequences: Commenting on House Speaker Kevin McCarthy’s (R-Calif) statement this week that the House would vote on a bill to lift the debt ceiling until 2024, Krugman wrote that it wasn’t even clear that the speaker "could deliver on the dead-on-arrival, vague sketch of a deal."

“We’re only a few months from the point where America won’t be able to keep paying its bills — that is, spend the money Congress has already told it to spend — unless Congress votes to raise that limit,” Krugman added.

The economist noted that Republicans are unwilling to raise the debt limit unless they are given the policy concessions that they would never be “able to enact via the normal legislative process.”

“Indeed, failing to raise the debt limit would have disastrous consequences” that could include a major disruption to the functioning of the federal government and the precipitation of a global financial crisis worse than the Great Recession, Krugman wrote. The economist added that, although the U.S.' debt is usually considered the “ultimate safe asset” and linchpin of financial markets around the world, "[many] markets might freeze if investors lose confidence that we’ll honor that debt.”

See Also: Fed's Mester Says Congress Must Address Raising Debt Ceiling, Confident Legislators Will Act

A Way Out: Krugman wrote that, if McCarthy allows a floor vote on the debt ceiling, several GOP members could cross the aisle and vote to raise the debt ceiling.

The economist also outlined other options that the Biden administration could pursue, including:

• Invoking the Constitution's 14th Amendment, which states that the validity of the U.S. public debt “shall not be questioned”
• Issuing platinum coins
• Issuing premium bonds

U.S. law allows the federal government to issue commemorative platinum coins in any denomination, wrote Krugman, who added that the government could choose to mint a coin notionally worth $3 trillion and deposit it at the Federal Reserve. The government could then pay its bills by drawing down the account, he wrote.

Premium bonds, on the other hand, are bonds that offer an unusually large "coupon" relative to their principal, Krugman wrote. “The Treasury could auction off these bonds for substantially more than their face value, in effect borrowing without increasing the official size of the debt,” he explained.

Read Next: U.S. Debt Ceiling Deadline Could Come Sooner Than Anticipated, Warn Bank Analysts

Photo: Commonwealth Club via flickr