Ron Paul, the libertarian presidential candidate and Congressman from Texas has proposed an interesting idea for getting around the need to raise the nation’s debt ceiling. He suggests that the Federal Reserve simply destroy the Treasury notes it holds, which amount to some $1.6 trillion.
These Treasury bonds are essentially money the government owes itself, or better to say, money one part of the government, the Federal Reserve, owes another part, the Treasury Department. [Correction: The Treasury owes the Fed, not the other way round. Thanks to a reader for pointing out my mistake. As for the "private" nature of the Fed, well, I drove by their HQ here in DC the other day and it sure looked like an official government office. Yes, it is technically a private concern but it provides a function mandated by the government. This is a distinction without a difference.] The Fed, of course, is jealous of its independence from normal political influences, an independence that has served it well. Think of Paul Volcker tackling inflation despite political pressures and Ben Bernanke’s skillful responses to stop the collapse of the economy during the late 2008 meltdown when responses to that meltdown were being judged primarily in political, not economic, terms by both sides of the aisle.
I am sure that there are some economic difficulties with Congressman Paul’s solution: if it were painless, it would have been done before. But, the value of Paul’s solution is not economic, it is political. It frees the nation not only from an impending debt ceiling crisis but from the political calendar.
In the past three years, it has become obvious that the nation faces a growing economic challenge in the form of its rising national deficit and debt. Much of the fault can be laid at the feet of George W. Bush who passed tax cuts while increasing government spending at home and abroad. Much of the fault can be laid at the feet of the Democrats who never met a government program they want to kill. President Obama can be blamed for his Stimulus which was either too big or too small but spent a lot of money and did not get the economy moving again. (It can, I think be argued, that we would be in much worse off shape had there been no stimulus.)
Almost all of the blame for the country’s fiscal mess, however, can and should be laid at the feet of the American electorate. We like big government but we just don’t want to pay for it as witnessed by the Tea Party rally against the Democrats’ health care reform which carried some signs that read “No Socialized Medicine” and other signs that read “Hands Off My Medicare.” We want smaller government, but we like those programs that allowed our local school to get new computers. We detest government regulation, except the ones that keep our air and water clean, our food supply free from fatal bacteria, and that helped that nice disabled girl down the street by requiring a ramp at the school for her wheelchair. Worst of all, ill-informed Americans latch on to simplistic diagnoses or simplistic solutions to their problems, complaining about the bailout of the auto industry which was an unqualified success or promoting more federalism in Washington while failing to let the governors, already swamped with their own economic and budgetary challenges, know that they will be responsible for more government programs than before.
The beauty of Ron Paul’s idea is that it moves the debt ceiling deadline past the next election which allows both parties to explicitly organize their campaigns around their proposals to meet this central political challenge. If the Republicans really, really want to change Medicare into a voucher program rather than raise taxes on rich folk, let them persuade the American people that is the route to go. If the Democrats want to try and present a multi-faceted approach that raises some taxes but also cuts some spending, thus denying themselves the kind of clarity the GOP stance has, let them try. What is key is that the American people will have to decide and whoever wins the next election will emerge with a mandate to achieve their program. Obama never really had a clear policy mandate because the economic crisis manifested itself so late in the campaign. America was riding a wave of hope when the economy knocked our legs out from underneath us.
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It is clear that the two parties, in ways never seen before in my lifetime, are becoming as ideologically distinct as they have been since the Great Depression, in some ways more ideologically distinct. There are no more liberals in the GOP ranks, no LaFollette or Norris or Javits. There are no conservatives giants in the Democratic caucus like Richard Russell. And, the central divide between the two parties is on the nature and role and scope and size of government, and how to pay for that government. If Ron Paul’s solution buys us the time to focus on that debate, and not to muddy the waters with compromise now, it would be salutary for the political future. We have a choice to make about the direction we wish our country to go, and that choice should be made as clear as possible.