Paul Krugman explains how it works: Should President Barack Obama mint a $1 trillion platinum coin?
Yesterday, we offered a few first thoughts about this novel idea. Later in the afternoon, Paul Krugman doubled down on the peculiar proposal in a blog post.
First, Krugman constructed an argument against the idea that this action “would be undignified.” You can judge that one for yourselves.
Moving right along, Krugman explained how the magical coin would work.
We aren’t saying that what follows is wrong. We’re saying it’s deeply revealing:
KRUGMAN (1/8/13): The other objection is the apparently primordial fear that mocking the monetary gods will bring terrible retribution.We’re not saying that any of that is wrong. Here’s what we are saying:
What the hysterics see is a terrible, outrageous attempt to pay the government’s bills out of thin air. This is utterly wrong, and in fact is wrong on two levels.
The first level is that in practice minting the coin would be nothing but an accounting fiction, enabling the government to continue doing exactly what it would have done if the debt limit were raised.
Remember that the coin is supposed to be deposited at the Fed, which is effectively just a semi-autonomous government agency. As the federal government proper drew on its new Fed account, the Fed would probably respond by selling off some of its $3 trillion balance sheet. In effect, the consolidated federal government, including the Fed, would be financing its operations by selling debt instruments, just as always.
But what if the Fed decided not to shrink its outside balance sheet? Even so, under current conditions it would make no difference—because we’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all.
And if you’re tempted to deny this diagnosis, I have to ask, what would it take to convince you?
Suppose Obama minted the magical coin. Presumably, he would then give a speech to explain what he had done.
If he gave anything like that explanation, no one would have the slightest idea what he was talking about. And remember:
Obama had very little luck explaining his health plan, which is perfectly sensible and ordinary as compared to the oddness involved in minting a magical coin.
The minting of the magical coin would immediately be treated as a crazy action. It would sound like a crazy idea to most voters; Obama would be widely seen as some sort of lunatic. There would be no earthly chance that anyone could explain the logic of what he had done. A remarkable degree of political turmoil would ensue.
Krugman doesn’t seem to know that. This takes us back to Krugman’s vast strengths—and to his one area of weakness.
For the past dozen years, Krugman has been the MVP of mainstream American journalists. It’s hard to imagine life without him. In budget areas, almost everything we liberals know has come to us from Krugman's work.
On the other hand, Krugman doesn’t have a background in street-level politics. In a major magazine profile, Benjamin Wallace-Wells offered this remarkable picture of Krugman’s political awareness as of 1999:
WALLACE-WELLS (4/24/11): Krugman had begun the work that would eventually win him the Nobel Prize...by the time he was in his mid-twenties, and so for nearly all of his adult life he has had good evidence for the proposition that he is smarter than just about everyone else around him, and capable of seeing things more clearly. Krugman is gleeful about being right, joyous in the revelation of his correctness, and many of his most visible early fights were with free-trade skeptics on the left. Of Robert Reich, for instance, Krugman wrote: “talented writer, too bad he never gets anything right.” He was a liberal and a Democrat, but even in 1999, when he was hired by Howell Raines to write his Times column, “I still saw equivalent craziness on both sides.”Assuming Wallace-Wells is presenting an accurate portrait, that highlighted statement by Krugman strikes us as remarkable. As of 1999, Krugman hadn’t noticed the decades of crackpot disinformation coming from the right. He became politicized as he reviewed Bush’s proposals and the way they were being presented.
This evenhandedness began to disappear almost immediately. Four months after his first column, Krugman began studying the economic proposals of the Bush campaign and found, somewhat to his astonishment, that they were deeply disingenuous...
That general cluelessness has defined the work of the liberal world over the past forty years. Even as we mock more successful players like Grover Norquist, our side has displayed an endless tin ear when it comes to political discourse.
The liberal world has twiddled its thumbs as the public has had its head filled with nonsense and disinformation. That same tin ear is on display in the case of the magical coin.
Two facts emerge from the growing idea that Obama should mint that coin:
We don’t know how to talk: First, this represents the liberal world’s concession of a basic point—we don’t know how to talk pork to the people.
Should the debt limit be increased? Of course it should be increased—and the point should be easy to explain.
But rather than try to explain that point, we want to mint a magical coin! This represents a concession which is long overdue: Norquist knows how to influence voters. We don’t know what to say to those people. If we tried to persuade the public, we would have little chance of success.
We don’t understand the discourse: Go ahead—reread Krugman’s explanation of the platinum coin. Again, we aren’t saying that his explanation is “wrong.” We are asking you to imagine what would happen if Obama gave a speech in which he explained his coin.
It would be one of the strangest moments in American political history. Around the web, there is barely a clue that our “intellectual leaders” know that.
For decades, we have wondered how it can be that our side is so spectacularly inept. The source of our manifest cluelessness remains a powerful mystery. But it’s now clear, beyond any doubt, that our intellectual leaders lack the first clue about the way the American discourse works.
Our leaders sat around for years when all that shit was being promoted. The Social Security trust fund was an accounting fiction! Al Gore said he invented the Internet!
Our side didn’t say squat about such matters—nor did we manage to get off our asses in the recent case of Susan Rice. Our side doesn’t seem to know how to notice, observe or talk.
Through thick and thin, our intellectual leaders have shown the tinnest of all tin ears. But now, at long last, it’s perfectly clear:
For whatever reason, we liberals can’t function in the world. We’ll keep telling ourselves that we're the smart people. But our ultimate cluelessness is now apparent.
As such, our public discourse is doomed. But then, this country has had no real public discourse for a great many years.
Disinformation fills the air. Gigantic areas can't be discussed. But people:
Mitt Romney strapped his dog to the roof of a car! That’s what our leaders have told us!