Forget the $1 trillion coin: Should the U.S. issue IOUs to avoid a debt default?

The Week
The U.S. government is totally good for it.
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The U.S. government is totally good for it.

The latest plan to prevent the GOP from taking the economy hostage

The $1 trillion coin is a controversial, widely misunderstood proposal to prevent the U.S. from defaulting on its debt once it breaches its borrowing limit of $16.4 trillion. The plan's supporters, most of whom are liberally inclined, contend that the coin is the best way to assure that the U.S. continues to pay its bills and avoid economic catastrophe, while robbing intransigent Republicans of a hostage with which it can demand deep spending cuts. A quick recap of the theory: The coin would be deposited in the Treasury's account at the Federal Reserve, which would instantly reduce the government's debts by $1 trillion; the government could then borrow more money to continue fulfilling its myriad obligations, such as Social Security checks, federal salaries, payments to defense contractors, interest rate payments, etc. 

The $1 trillion coin, however, has run into some political challenges, all of which stem from the fact that it sounds like Obama would be forging the monetary equivalent of the One Ring to Rule Them All in the fires of Mount Doom. Supporters say the coin is no less absurd or irrational than the GOP's threat to force the U.S. into default, but the surreal aura of a $1 trillion coin will not disappear no matter how hard the American public rubs its eyes. As Ross Douthat at The New York Times rightly argues, it would be easy for Republicans to portray the $1 trillion coin "as a Bond villain scheme rather than a legitimate policy move," and "public opinion, which currently favors Obama and the Democrats and regards congressional Republicans as the more irresponsible party in these negotiations, would probably tilt sharply the other way."

But advocates of economic sanity can take heart: There is another option if the GOP-controlled House refuses to raise the debt ceiling. According to Edward D. Kleinbard at The New York Times, the U.S. government could issue IOUs instead of Social Security payments and the like, which would not technically add to the U.S.'s debt. Kleinbard:

There is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — "registered warrants" — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these IOUs could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn't constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one. [New York Times]

"Scrip" has the ring of "reconciliation," "sequestration," and other obscure parliamentary/budgetary maneuvers that the American public has grown accustomed to. Furthermore, issuing scrip has a bona fide precedent: California did the same thing in 2009 when its gridlocked legislature could not reach a budget compromise. And issuing scrip would keep the pressure on the GOP, according to Jonathan Chait at New York:

If you imagine the IOU solution in practice, it has some nice upsides. House Republicans have failed to lift the debt ceiling, sparking a crisis. The administration is responding to the crisis and neutralizing, as best as it can, the economic damage caused by crazy Republicans. Government contractors are getting IOUs, keeping them in business, but not making them terribly happy. Then they start screaming at the House Republicans to stop being crazy people and just raise the debt limit already. That would have the benefit of inflicting political harm on the hostage takers and likely make them both take responsibility for the solution and shy away from weaponizing the debt limit again. [New York]

Ardent supporters of the $1 trillion coin, such as Joseph Weisenthal at Business Insider, may be disappointed to see the coin idea scuttled. But Weisenthal acknowledges that the IOU theory puts the economy on safer ground: "We've reached a new stage, where a lot of the discussion is not about if the debt ceiling will be raised, but how Obama will circumvent it if/when it's not raised. Arguably that itself represents a loss of GOP leverage."

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