It's not clear when, exactly, the federal government will hit the debt ceiling. The Democrats and the Republicans are, nevertheless, both making preparations so that whenever it happens they will be ready.
It is not unreasonable to expect that the debt ceiling fight to be a "battle royal," with the Republicans pressing their institutional advantage to win greater cuts in spending than the Democrats want. Indeed, House Speaker John Boehner has repeatedly emphasized that, as far as he is concerned the "Boehner rule" is still in effect, meaning that every dollar increase in the debt ceiling must be matched by a dollar in spending cuts.
The Democrats are of a decidedly different mind. They believe they won the battle of the fiscal cliff and, as far as spending is goes they have a valid case. The something on the order of 41 to 1 ratio of tax hikes to spending cuts: more spending and more taxes, starting with $1 trillion in new, additional taxes over 10 years according to some reports.
The Republicans think they have two aces in the hole. First, the dreaded mandatory, across-the-board sequester that the Democrats are desperate to get rid of it before it goes into effect. Their coalition partners--labor unions, social welfare groups, and special spending interests--hate it and want it gone and, on this issue at least, they call the tune while the politicians in their pockets dance.
The second is that inaction this time favors the frugal. Unlike the fiscal cliff, when inaction by Congress and the president meant taxes and tax rates would increase by record levels, failure to increase the debt ceiling freezes federal spending as the government shuts down.
Now, before anyone tries to press a now shopworn political point, it is important to understand that many Republicans now believe 1995's shut down standoff between Bill Clinton and Newt Gingrich was ultimately worth it, even if the GOP's poll numbers dipped for a time.
The shut down proved to Clinton and to the country that the Republicans were indeed serious about bringing spending under control. The shut down led to the longest sustained period of fiscal restraint in recent memory. Figure the political calculations for yourself but remember the political fights of 1995 were followed in 1996 by first re-elected Republican-controlled House of Representatives in more than 60 years.
The threat of a shut down may be the leverage the Republicans have in mind but Obama still has a trick or two of his own to play including one novel idea for sending a flood of new revenue into the U.S. Treasury.
As The Washington Post has described the idea, "Thanks to an odd loophole in current law, the U.S. Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases." The Mint could, at the president's direction, produce one or two $1 trillion dollar platinum coins and put them on deposit with the U.S. Federal Reserve. The Fed could then send the money to the Treasury and, voila, an extra couple of trillion appears on the federal balance sheets. The government avoids the debt ceiling and the Republican leverage on spending disappears. Game, set, match to Obama.
This would, of course, debase the currency, leading conservatives who believe in sound money to the barricades. One of them, American Commitment's Phil Kerpen, has gone as far as to set up a website at StoptheCoin.com against the idea and in support of legislation offered by Oregon Republican Rep. Greg Walden that would specifically bar the president from ordering the platinum coins be struck.
"It sounds like a joke," Kerpen said in an E-mail to his group's supporters. "It should be a joke. But it is real: Liberal pundits and Democratic members of Congress are urging President Obama to mint trillion-dollar platinum coins to fund continued government spending above the federal debt ceiling."
It may all sound ludicrous on its face the idea has the support of, among others, the influential New York Times columnist Paul Krugman and Joseph Gagnon of the Peterson Institute for International Economics.
"When intellectuals of such distinction can state ... that 'There's nothing that's obviously economically problematic' about a theoretical near trillion dollar discrepancy between the intrinsic, or market, value and nominal value of U.S. legal tender it would appear that cleverness is triumphing over motherwit in Washington," writes Ralph Benko about Gagnon on his blog The Gold Standard Now
The platinum coin trick does not pass the laugh test; this does not mean, however, that the idea is going nowhere. Unless Congress acts to prohibit the coins from ever being struck it is always possible the president, any president could keep one or two up his sleeve just in case. It's bad policy, bad politics, and bad economics. It should be rejected out of hand and the White House should make clear it has been.