Jonathan Bernstein and Paul Krugman both have thoughtful responses to my case against minting a platinum coin to solve the debt ceiling. Reading their replies -- and talking Thursday with Bloomberg View's Josh Barro -- has helped clarify the issue for me.
Let's start with where we agree: Going over the debt ceiling would be horrible. I am not, in any way, arguing for complacency in the face of that threat. Nor do I think we should go over the debt ceiling to prove a political point. My argument is not, as Krugman suggests, a "shock doctrine" argument. If it came off that way, that's merely my poor writing. My view on breaching the debt ceiling is clear: It would be a disaster of unbelievable proportions.
Where we disagree is in where we see the dangers. Supporters of the coin seem oddly sanguine that we can mint this coin and use it to pay off our debts without matters going horribly awry at some juncture. They're confident that the political backlash will be manageable, the Federal Reserve cooperative, the technical challenges feasible, the market reaction calm, and the legality unquestioned or at least not judiciable. Moreover, they're mostly confident that once the coin is used, Republicans will fold on the debt ceiling, recognizing their leverage gone. At that point, we can melt the coin, no harm done. Few seem to be contemplating a scenario in which we embark on a platinum-coin-based approach to funding the government in perpetuity, perhaps realizing that under that scenario, the problems compound mightily.
At the same time, supporters of the coin are quite fearful that Republicans are indeed as extreme as some (though not all) of their public rhetoric would suggest. They think that Republicans really will push the country into default rather than, say, fold and choose to fight over the sequester or the continuing resolution. They think the media will report on the debt ceiling as if it's the fault of both sides, obscuring the lines of accountability. They think the business community either won't involve itself or won't be able to move the Republicans.
I'm the precise opposite. I think that it's very likely that, in using the coin, something will go wrong. The possibilities I focus on in my article are that the political backlash will strengthen the Republicans' hand and, even worse, make it harder for sober Republicans to persuade the party to back down on the debt ceiling. In addition, there's a good chance that the markets will see the coin as a kind of default-lite -- evidence that American politics is tipping into a dire and unpredictable period of crisis and mismanagement (read Brad Plumer's interviews with bond traders on this). I've also been convinced by some experts that the legal and Federal Reserve questions are dicier than the blogosphere thinks, though it's hard to evaluate that, and so I left those questions out of the original post.
That said, I think it highly unlikely that the Republican Party will actually push the country into default if it can't get Democrats to name and then vote for Medicare cuts. The lesson of the fiscal cliff fight is that, yes, Republicans fold. There are already cracks in the GOP's coalition over whether holding the debt ceiling hostage is such a good idea, with Newt Gingrich, the Wall Street Journal and assorted columnists beginning to head to the exits. The closer we get to default, the more focused and unbearable the pressure from the business community is going to become. As Gingrich put it, "The whole national financial system is going to come in to Washington and on television, and say: ‘Oh my God, this will be a gigantic heart attack, the entire economy of the world will collapse. You guys will be held responsible.’ And [Republicans will] cave."
Minting the coin would interrupt that process, uniting Republicans -- and many voters and business groups -- against what they would see as an unsettling, illegal and inflationary power grab from the executive. And if you think the press spreads blame too equally over the debt ceiling, wait till you see the coverage if the White House decides to respond by creating a trillion-dollar coin out of nothing. You can explain the basic logic of fiat currency until you're blue in the face, but it's not going to matter. That coin would drive our country's increasingly deranged politics, which are really at the heart of this crisis, to the edge.
I think that minting the coin could go quite badly, while the debt-ceiling fight would likely end quite well, with Republicans finally admitting they're not willing to allow default. And forcing the Republican Party to accept a more normal approach to politics is, in the end, the main objective. That doesn't mean Washington will enter an Edenic period of cooperation and compromise. Republicans would probably just content themselves with threatening more ordinary government shutdowns. But that itself would be a real advance.
Supporters of the platinum option believe that minting the coin would to go quite well and that without it the debt-ceiling fight would likely end quite badly. That's the crux of the disagreement: They have a confidence in the coin, and a fatalism about our politics, that I don't share.
In the event that we actually breach the debt ceiling and Republicans don't fold almost instantly, the situation changes. Again, I think this fairly unlikely. But if financial markets are roiling and the country is crying out for a resolution that Republicans, in a fit of political and moral insanity, won't provide, then many of the drawbacks to minting the coin or invoking the 14th Amendment dissipate. At that point, such a move may seem entirely reasonable: It could bring relief to the public and the markets, and Republicans would properly take the blame -- and the consequences -- for having nearly destroyed the global economy. True crisis has the tendency to turn the utterly unthinkable into the absolutely necessary, as any policymaker who participated in the bailout of AIG will tell you.
But we're not there yet, I don't think we're going to get there, and I think announcing a mint-the-coin policy in advance will make matters worse.