A lot of people seem to be talking past each other about the Trillion Dollar Coin idea. That sometimes happens on Twitter and the blogosphere, where much of the debate has taken place.
But one place to start a reasonable discussion is to note again that nobody really disagrees with this:
Any Negotiated Solution > Trillion Dollar Coin > Default
Those advocating for the Trillion Dollar Coin have been honest in saying that their idea is both crazy and the second-worst possible outcome. It’s just that the first-worst outcome of default is many times worse. Yes, a Trillion Dollar Coin would represent a complete political breakdown, a power grab by the President, and set an awful precedent — but even these consequences would pale in comparison to the human suffering that would be unleashed by a default on US obligations. So far so good.
But here is where it’s important for advocates to define carefully what they’re actually calling for. From what we’ve read thus far, they mean one of two things:
1) The White House should threaten to use the coin, and when the Republicans realise that Obama is willing to use the option, trade a closing of the loophole for an end to the debt ceiling.
We’ve thought about this more in the last day or two, and we have one main objection, which is that making the Coin threat public has a non-trivial chance of becoming a disincentive to reaching a negotiated outcome, the exact opposite of its intended purpose.
Here’s why: For the Republicans, having Obama threaten to use the coin might be wonderful news because then they could force him to actually use it. By this reasoning, not only will the worst-case scenario of default be avoided, but they could then look forward to screaming “Dictator!” while accusing him of having used a legally questionable tactic (or at least of going against the intent of the law) and of running an end-around on the balance of powers (and actually they’d be right about this).
This argument would be ludicrously hypocritical, but unfortunately it would also play better publicly than the hypothetical White House defence. Which would probably sound something like this: “The Republicans backed me into a corner again, and despite my being the president who said that we should all put aside childish things, I ordered a shiny coin and called it a trillion dollars, which I’m allowed to do because of a poorly written amendment to a law that was undeniably meant for something else.” Not exactly a winning case.
In fact, the above problem really applies to any public threat made by the White House to use a solution that doesn’t involve Congress, which is probably also why Obama and Geithner continue to insist that only Congress can avert a crisis.
The advocates for threatening a Trillion Dollar Coin have a strong case that the economics of it are sound and also that it is probably legal. And they’re right that the continued existence of the debt ceiling is a national embarrassment.
What they haven’t convinced us of is that publicly threatening a Trillion Dollar Coin is a smart negotiating tactic. Maybe we’re completely wrong about the above scenario; we’re not remotely an expert in political negotiations, if there is such a thing. But it seems as plausible as the Republicans simply buckling, and might even give the Republicans a different out if they actually don’t intend to push the debt ceiling debate to the brink of default. (See also Tyler Cowen.)
2) Don’t threaten to mint a Trillion Dollar Coin or even mention it publicly, but privately keep it in reserve as a legitimate option if in fact we get to the point where it is the only option other than default.
This seems more reasonable, and in fact we’d even go a little further in saying that the White House should be quietly exploring all other options while publicly saying that only a Congressional solution makes sense. So the coin should only be minted if two conditions are satisfied: a negotiated outcome is impossible, and the coin is the least-bad executive workaround. We’re willing to be persuaded, but right now the second option makes more sense to us and is probably already happening, so there’s not much more we can say about it.
But we would ask those pushing for it to be clearer on two points: 1) Which of the above two options are you pushing for? 2) If the answer is the first, why is it a smart strategy not just from an economic or policy perspective but as a negotiating gambit? What risk is there that the Republicans will be all too happy to call the bluff?
Related link:
Debt ceiling dealing drama – FT Alphaville
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.