Friday, August 12, 2011

Solving Fiscal Problems In A 10-1 World

How do you reduce the national debt in a world where you can't raise taxes, because Republicans won't raise taxes by x even if you offer them 10x the spending cuts?

There's one straightforward solution: print more money. Or, as we've discovered we can do, mint the trillion-dollar platinum coins! You get two kinds of debt reduction. First, you get nominal, though also real, debt reduction when you use the coins to pay back debt (maybe you have to ask Ben Bernanke for change for a trillion first? I'm not sure how that works). You also get real debt reduction when you generate inflation, and the real value of the national debt decreases. The pain of inflation is borne by people who have lots of cash, who tend to be rich, so it's kind of like taxing the rich.

Of course, nobody really cares about reducing the national debt except for conservative Democrats, a few economists, and Pete Peterson, so it's not like the answer really matters. Everybody else talks about it so they'll sound serious and responsible, and making the trillion dollar coin doesn't really sound serious and responsible.


Ron E. said...

Printing coins to increase inflation only would work if the Fed were on board and declined to raise interest rates. The more plausible way to reduce the debt is to grow the economy and let the Bush tax cuts expire on schedule.

Neil Sinhababu said...

This depends on how Ben Bernanke sees the situation. If he feels politically constrained and doesn't want to be regarded as pushing looser monetary policy, but is happy to sit on his hands while somebody else does the dirty work, executive branch monetary stimulus should be fine by him.