The United States is hurtling toward a debt crisis, and the prospect of default is beginning to roil markets. The curious thing about this possible crisis is that it has nothing to do with excessive indebtedness. Maybe they think the federal government has tried too hard over time. We can discuss it, but now it is beside the point. The United States in 2023 is not like, say, Greece in 2009 or Argentina in 2001. Investors have not turned off the tap because they have lost confidence in our solvency.

On the contrary, the crisis looming over our country will be entirely self-inflicted or, to be more exact, inflicted by Republicans. If it happens, it will be because the party that controls the House of Representatives refuses to raise the debt ceiling, a peculiarity of the U.S. budget process that allows Congress to prevent the government from making payments that have already been approved through previous laws.

There are three things you should know about this crisis. First, regardless of what the courts say about the constitutionality of the debt ceiling, budget decisions should be dictated by votes on spending and taxes, not by hostage-taking in which the party most willing to destroy the economy gets what it wants. Second, if the policy of extortion leads to a default on the debt, the consequences will be catastrophic. And third, the various ways in which the Biden administration could try to circumvent Republican extortion and continue to govern as normal would not entail any economic disadvantage. Contrary to many misinformation circulating out there, measures such as issuing premium bonds or minting a platinum coin would not be inflationary. They seem unworthy, but to provoke a worldwide depression because we are afraid of looking foolish would be totally irresponsible.

Here's how the budget process is supposed to work: Congress passes bills that set tax rates and determine spending, and that become law when the president signs them. In most cases, legislated spending exceeds revenue, so the government has to borrow to cover the difference. So be it. However, due to a peculiarity of American legislation of complicated origins, Congress has to vote a second time to authorize the borrowing demanded by its own previous votes.

What would it mean if Congress refused to authorize borrowing, that is, to raise the debt ceiling? It would not serve to contain spending. Instead, it would amount to preventing the president from making payments that Congress has already ordered. It would be like buying a bunch of furniture for home, accepting delivery, and then refusing to pay the bill. And it would have enormously destructive effects.

A new report from the White House Council of Economic Advisers lays out the potential costs of a default induced by the Republican's refusal to raise the borrowing limit. The analysis indicates that a prolonged default could cost eight million jobs as a result of its impact on consumer and business confidence, a rise in interest rates on US debt (which investors would no longer consider safe), and drastic forced cuts in government spending.

It is even possible that these forecasts underestimate the likely damage. So far, the world has seen U.S. government bonds as the ultimate safe haven asset. Consequently, Treasuries play a crucial role as collateral in many financial transactions. If these obligations cease to be safe—they become IOUs that the United States cannot liquidate—the entire global financial system could be paralyzed.

In fact, this was about to happen for a few days in March 2020, and it is unclear whether a bailout could be engineered in the current political environment.

So what can be done? Not reaching an agreement. Republicans are bent on a tax version of Jan. 6, 2021, using the threat of destruction in an attempt to exert total control even though voters gave them only one chamber of Congress. President Joe Biden should not give in to extortion, let alone strike a deal that bends to the demands of the extremists who control the House Republican caucus.

Biden may simply declare that he has an obligation to enforce properly enacted legislation and that preventing him from doing so by limiting debt is unconstitutional.

Beyond this are the tricks. Yes, they would be tricks. I don't have space to explain premium bonds, but they would involve playing with the definition of "debt." As for the platinum coin, the law allowing the government to mint a trillion-dollar coin was never intended as a way to get around debt ceiling extortion, but neither was it designed to provide an extortion mechanism.

And using these tricks would not entail significant economic disadvantages. I have been very surprised to see people and entities that should have more discretion, including the mainstream media, present as fact the myth that, for example, minting the currency would be inflationary. It wouldn't be; It would only be a subterfuge to continue with normal financing, circumventing the letter of a debt limit that, to begin with, should not exist.

I'm not sure what specific strategy the Biden administration will take, but the guiding principle should be to do whatever it takes to get out of it. Whatever it takes is not giving in to extortion.

Paul Krugman is a Nobel laureate in economics. © The New York Times, 2023. Translation of News Clips.

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