The red wave that wasn’t has consequences for policy-making in Washington. One result of the GOP’s new, narrow House majority is that outlandish and marginal policy proposals from the fringes of both parties will get more attention than they otherwise would. The coming battle over raising the debt ceiling will serve as a case in point.
The debt ceiling, now at about $31.4 trillion, limits the amount of total debt the federal government can take on. For context, this currently is greater than the United States’ GDP of $25.7 trillion.
The government runs deficits every year, so Congress has to raise the debt ceiling every so often. If it doesn’t, the government cannot float new bonds, risking a default and a partial shutdown. The government is on track to hit the debt ceiling around July and must raise it before then.
Debt-ceiling raises are usually routine, but with the aforementioned, narrow GOP majority in the House, this year’s vote is no sure thing. Pundits are already floating ideas of varying quality to work around the impending congressional drama.
Among the worst is a revival of the trillion-dollar-coin thought experiment that made the rounds in the media a few years ago. The Treasury Department could, in theory, mint a single, platinum coin worth $1 trillion and deposit it with the Federal Reserve, which would use it to pay off debt and get back under the debt ceiling.
The main reason this wouldn’t work is that money is supposed to match real output if it is to retain its value. If the amount of money goes up by a trillion dollars while the amount of goods and services stays the same, the result is inflation.
Treasury secretary and former Fed chairwoman Janet Yellen was right to call the trillion-dollar-coin idea a gimmick that erodes the Fed’s independence. The Fed already has the power to create new money and buy up federal debt. It was doing so as recently as March 2022 and could continue to do so without interference from the executive branch. The reason it stopped is that it contributed to today’s inflation.
In response to the Covid downturn, the Fed did implement something like the trillion-dollar-coin idea, minus the metal. It created about $5 trillion in new money between 2020 and 2022 in an attempt to stimulate the economy. The result was massive inflation, which the central bank is still struggling to unwind.
A trillion-dollar coin would cause inflation equivalent to a one-time $3,000 tax on every American — on top of existing inflation of 6.5 percent in 2022 and the $4.9 trillion people have paid in federal taxes. This trillion-dollar-coin tax would manifest in subtle ways, a point many analysts have missed. There would be small price increases on everything, as well as an increase in nominal interest rates, which would distort investment and business decisions. There would be ripple effects in the housing and auto markets, which depend heavily on financing. Part of the cost would come in opportunity costs, through slower growth.
At any rate, $1 trillion would buy less than a year of debt-ceiling relief, after which either the Treasury Department would have to mint another coin or leadership would have to cave in to whatever demands the populist holdouts in Congress think up in exchange for their assent to raise the debt ceiling.
There are better ways to address the problem, though none of them are easy. One is to focus on its cause — overspending. To begin with, this would require Congress and President Biden to stop passing endless spending bills that have little to do with pandemic relief. Republicans can’t fix America’s debt crisis with gridlock, and President Biden can’t fix it by refusing to consider reforms (none of which should involve trillion-dollar coins).
Moreover, the debt crisis would have to be tackled alongside the looming entitlement crisis. Social Security has unfunded liabilities of $42.2 trillion; Medicare has $92.1 trillion. Entitlement reform might be a political third rail, but the math cannot be ignored. Replacing the unsustainable pay-as-you-go model with personal accounts, akin to individual retirement accounts (IRAs) and medical savings accounts (MSAs), is the best way to fix the debt problem for the long term.
Read the full article at National Review.