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Chris Dunn points out to me a column by Keynesian economist Dean Baker where he endorses Ron Paul’s introduction of a Congressional bill (H.R. 2768) that would abolish $1.6 trillion of debt owed by the Treasury to the Federal Reserve. Baker though sees it as an opportunity for the Treasury to spend even more money! Here’s Baker:

I mention this background since it is relevant to the reaction given a proposal on the debt ceiling that Ron Paul originally put forward and that I subsequently endorsed. Paul suggested that the Fed could destroy the $1.6 trillion in government bonds that it now holds as a way of getting room under the debt ceiling. Debt to the Fed counts as part of the government debt subject to the limit. If the Fed destroyed $1.6 trillion in debt, then it would create a space of $1.6 trillion under the ceiling.

Fortunately, for those who favor economic sanity, Ron Paul is one step ahead of Dean Baker. The bill includes a clause that will eliminate the bill being used as a manner in which to increase spending. Paul’s bill acalls for the simultaneous reduction in the debt ceiling by $1.6 trillion, so sorry Keynesian’s, as would be expected, there will be no increase in spending as a result of this Ron Paul bill.

Reprinted with permission from the Economic Policy Journal.

2011 Economic Policy Journal

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