According to Congressman Paul, to deal with the debt-ceiling impasse, we should tell the Federal Reserve to destroy its vast holding of government bonds.
This is simply not true, you can listen to the clip, here. It's a quickly moving conversation, but it shouldn't be difficult for a Harvard econ prof to realize that Congressman Paul's comment is not proposing that the Treasury default so that the Treasury can go out and issue more debt. He is saying that the elimination of the debt will result in the Treasury not having to raise taxes on the citizens to pay the interest on the debt. Further, immediately after this comment, Dr. Paul talks about getting the Fed completely out of the buying and selling of Treasury securities. Clearly, he is not at all proposing that the elimination of the debt so that it will give the Treasury room to room to issue more debt--which would be bought by a large degree by the Fed, but Dr. Paul's call is in the context of getting the Fed out of the trading Treasury securities (That is, the money creating business). What he is really doing is needling the Fed and the Treasury here.
Mankiw misses the needle and clearly has no understanding of Dr. Paul's view of the world, since Dr. Paul would be the last person in the world to advise on creating a technical loophole so that the Treasury could buy even more debt!
Mankiw thus fails on the comprehension level and also displays an amazing lack of understanding about the views of a presidential candidate that is polling at the 7% plus level. But that's not all, Mankiw goes on to turn his incorrect view into a question. He writes:
This would be a great exam question: What are the effects of this policy? Who wins and who loses if this proposal is adopted?He then provides his answer, which is wrong:
STOP READING. Think about the question yourself for a few minutes.
[It]is just an accounting gimmick. Since the Fed is really part of the government, the bonds it holds are liabilities the government owes to itself. Destroying the bonds has no direct economic effect. It is just like an increase in the debt ceiling, without any other policy changes attached.
It is not just an accounting gimmick. As Dr. Paul points out, it frees taxpayers from having to pay the tax on the interest on those securities. Second, although Mankiw says that there are no other policy changes attached, Dr. Paul discusses his concept in the terms of getting the Fed completely out of dealing in Treasury securities, which is a huge step in eliminating one of the major reasons the Fed uses to justify the money printing it does. Further, in the interview, Dr. Paul states that Congress will raise the debt ceiling anyway, so the impact that the Treasury defaulting on the Fed debt is zero, in relation to the debt ceiling. There will be no real impact relative to the debt ceiling, since it will be raised anyway. Where it will have impact is in the Federal Reserve's justification for printing more money, which is where Dr. Paul's focuses----which is a point apparently way over the head of Mankiw, even thought it is all stated in Dr. Paul's interview.