Advertisement

Debt ceiling has become a 'crazy kind of double jeopardy on government operations': Paul Krugman

The New York Times Op-Ed columnist Paul Krugman, who is also a Nobel Memorial Prize Winner in Economic Sciences, joins Yahoo Finance Live to discuss the economic impact of the debt ceiling crisis, a looming recession, and slowing inflation.

Video Transcript

SEANA SMITH: Well, let's talk about the economic impact of this debt ceiling fight with Paul Krugman. He's a "New York Times" opinion columnist who has also won the Nobel Prize in economics.

Paul, it's great to see you again. So we know that this is obviously an extremely serious situation. We talk about some of the warnings that we've gotten out over the last couple of days. Jamie Dimon saying that we're going to see panic as we get closer to that X-date. Treasury Secretary Janet Yellen saying global economic downturn will likely ensue. How serious is the situation that we're in right now?

PAUL KRUGMAN: Well, we don't really know. We have never really gone through this before. But there are reasons-- there are pretty good reasons to panic if we actually do have a technical default because US government debt is the foundation on which world financial markets rest. Basically, T-bills are the collateral of choice. They are the ultimate safe asset. And if it suddenly turns out that the US government doesn't necessarily honor its promises to pay T-bills, then who knows? But it could be really a cascading series of financial dislocations.

AKIKO FUJITA: Well, and, Paul, some would argue that the reputation has already been damaged regardless of whether we go past that X date-or not. I want to get to your framing of all of this because we're talking about the debt ceiling, potential compromises that could be reached, but you've said that get rid of the debt ceiling altogether. Why?

PAUL KRUGMAN: Yeah, the debt ceiling is fundamentally crazy, right? You have-- Congress votes and votes on spending bills and votes on tax bills. The end result of those bills is whatever happens to the budget deficit, and the US government, if it's a deficit, has to borrow. And then Congress votes again on whether to allow the borrowing that is required by its own legislation. So you're basically getting-- I think someone's analogy was that it's like ordering a meal at a restaurant. You order everything. It's prepared. It's all about to be delivered to your table. Then you say, no, I'm not going to pay the credit card bill, and I'm walking out of the restaurant.

That's not-- that's an insane second step. None of this is about fundamental decisions about spending or taxing or the budget deficit. This is all about whether, for political reasons, the party that controls one house of Congress can force the US to renege on promises it's already made.

SEANA SMITH: So then, Paul, if that were to be fact or if we were to see that happen, then how should Congress then I guess handle the government's borrowing limit or really the government's borrowing then going forward if there's nothing keeping it in check?

PAUL KRUGMAN: Well, but there is. I mean, the government can't spend anything that hasn't been voted by Congress. Joe Biden can't go out and say, OK, I'm going to offer Medicare for all because I feel like it. It would have to pass that through Congress, which is not going to happen by the way. A Republican president could not just say, OK, I'm eliminating the income tax because I feel like it. Congress would have to vote to do that.

So removing the debt ceiling-- I mean, nobody else has anything like this. This is a crazy kind of double jeopardy on government operations that makes no sense at all. The power of the purse rests with Congress, and it does not come from the debt ceiling. It comes from the fact that spending and taxing must be authorized by legislation.

AKIKO FUJITA: Paul, you've said in the past-- you've gotten a lot of traction calling for the Treasury to mint a $1 trillion coin. Essentially, if we're talking about the debt ceiling here, why not use that provision to do that? But, recently, it sounds like you've kind of switched a bit to talk about premium bonds. I mean, just-- I ask this because, while we're talking about the debt ceiling, whether there's a compromise or not, there are those who say there's got to be a whole other way to think about this because we're back at square one every few years now.

PAUL KRUGMAN: Yeah, this-- I still don't understand why Democrats didn't use the lame-duck session to just raise the debt ceiling to a level where it wouldn't become relevant for years. But the choices among different ways of possible end-runs around the debt ceiling, they're all-- the economics-- there's no difference at all on the economics. The platinum coin is-- when you actually work through the mechanics, it's actually just a way to enable the US government to borrow through the back door. Instead of having the Treasury sell newly minted bonds, it basically has the Fed sell off some of the bonds it already owns. And that ends up financing the US government.

Premium bonds is a way of issuing bonds that arguably would not count against the debt limit, at least not to the full value. But the differences among these things-- the economics is all the same. The economics-- it's just that the government continues to operate as it has been operating, and it's all a question of vibes. It's all a question of how badly does whatever method we take get misportrayed in the news media really? It's not-- it's not all about substance. Because on the substance, there's no difference whatsoever among these different routes.

SEANA SMITH: Paul, what's your assessment just of where things stand in the economy, with the debt ceiling debate set aside right now? Because since the last time we spoke, we've gotten another print on the employment numbers showing that growth is in fact slowing. We have seen some improvement on inflation. Inflation is slowing. Is there still the probabilities or still the odds that we're able to get inflation under control and avoid a recession?

PAUL KRUGMAN: I think that the-- technically, it's quite possible. I mean, we don't know for sure. I mean, one of the-- I sometimes think that the Bureau of Labor Statistics is just messing with our heads because it's like alternate reports either make you optimistic or pessimistic. And there's something in-- last month's data has something in it for everybody, no matter what your views are.

But, on the whole, it does look as if we are slowing without a large rise-- without any rise so far in unemployment. Inflation is slowing. A soft landing looks technically possible, but it's very tricky. I mean, the Fed does not have-- the Fed has enormous power, but it doesn't have fine motor control. It's-- or, as I say sometimes, the soft landing may be physically feasible, but you're trying to land a plane in dense fog with a lousy set of instruments that don't give you a very good idea of your current altitude.

So whether they can stick the landing is a separate question from whether it's feasible. But, so far, I mean, if you could think about what a lot of people were saying a year ago about how we would need years and years of extremely high unemployment to bring inflation down significantly-- and inflation is down significantly, and unemployment hasn't gone up at all.

AKIKO FUJITA: "New York Times" columnist Paul Krugman, it's good to have you on this Friday. Have a good weekend.

PAUL KRUGMAN: Take care.