the national interest

IOUs vs. Platinum Coin: Pick Your Hostage Rescue

Enthusiasts of minting platinum coins to forestall economic apocalypse have taken over the Internet, but a different crisis-aversion plan seems far more likely: Just have the Treasury Department issue coupons to its vendors. Paul Krugman suggested the idea a few days ago, and law professor Edward Kleinbard fleshes it out in today’s New York Times “Op-ed” page.

Here’s how it would work. Republicans refuse to increase the debt limit because they’re crazy. At that point, the U.S. Treasury can only spend as much money as comes in through tax receipts. The Treasury would pay bondholders, but certain categories of people — like government contractors — would get written promises of future payment, which could be bought and sold. Their value would depend on the expectation that the crisis will eventually be resolved. An IOU for a dollar would be worth less than a dollar, reflecting the risk that it will never be paid, or the payment will be delayed and without interest. But the discount would probably be very low, reflecting a general assumption that the crisis will probably be resolved quickly.

I expect liberal economic wonks to quickly splinter, Judean People’s Front vs. People’s Front of Judea–style, into pro-coin and pro-IOU factions. I like both options more than default, though the IOU plan has certain benefits. It has less of an immediate oh-you-can’t-be-serious hurdle. The main difference is that the platinum coin strategy essentially voids the debt limit — basically, you can use the coins to make Congressional votes unnecessary forever. The IOU solution still requires a debt limit vote eventually, but removes the drop-dead power from the deadline.

You can argue about the merits of each. 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.

The coin solution, by contrast, would surely spark wilder and crazier responses from Republicans in Congress and a continuing crisis of some kind, albeit one with less devastating long-term financial ramifications. Ultimately, both solutions sound a lot better than either default or paying a ransom (which would guarantee endless future hostage-taking and eventual default when negotiations invariably stalemate). The IOU plan seems to be the most promising way to pop the blister.

IOUs vs. Platinum Coin: Pick Your Hostage Rescue