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Real Fiscal Responsibility: What Chris Hayes Said

7:18 am in Uncategorized by letsgetitdone

I’m interrupting my series on US Government Real Fiscal Responsibility since the Carter Administration to write about something Chris Hayes said relating to Real Fiscal Responsibility. Back in February of 2014, he tweeted:

Recently, that tweet along with an image has been making the rounds on Facebook as an Alternet photo. The sound bite in the tweet looks great, after the manner of a logical truism.

But, logically, it doesn’t follow, because one can easily say that as long as the Government implicit in the statement isn’t a currency issuer, but a currency user who must acquire its funds by taxing or borrowing alone, that Government can involuntarily run out of funds. And it is conceivable that funds might be raised to fund a war, while that same Government might not have the funds available to take care of the people who fought for the nation, without defaulting on its obligations.

So, assuming that the Government is one that can involuntarily run out of money, the rich are saying that they think fighting a war using deficit spending is worthwhile and one’s patriotic duty; but that there are more important priorities than taking care of the people who fought it for their country. So, what are those priorities and what are the moral judgments in back of them? That is really the issue in a situation of limited Government financial resources!

The rich often believe, that lowering the risk of inflation which, they think, would cost them money, or avoiding taxes, which would also cost them money, are more important priorities than taking care of the people who fought the wars for us and them. They don’t think they owe them a thing. Or alternatively, they think that what is owed to them should come out of other people’s pockets, so that it should be “paid for” by increased taxes on the poor and the middle class, or perhaps by cutting Government programs that serve them.

This view is morally reprehensible, of course, and it is also despicable when you consider that they and theirs also make sure that they don’t have to fight the wars, so that burden too falls on the poor and the middle class. So, Chris’s statement makes political sense because it sounds like an undeniable moral proposition, a moral truism.

On the other hand, a Government like the US’s with the authority and capability to create unlimited currency if it needs to, can always afford to both deficit spend on a war, and also deficit spend to take care of those who fought it. So, in that situation, the US’s current one, it is a truism that the Government can afford to deficit spend to fight a war and also to take care of the people who fought it for us. But, here, there are no “ifs” about it.

We can do both. And we can also expand Social Security benefits, and deficit spend on new energy foundations, and deficit spend on an enhanced Medicare for All program. We can do all these things and more without running out of money, because, as the currency issuer, the Government can do all sorts of things and never run out of money.

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Real Fiscal Responsibility 5; Carter: Environmental Degradation

5:59 am in Uncategorized by letsgetitdone

Love Canal Emergency Declaration Area Plaque at site of 93rd Street School, the school had been knowingly built on top of Hooker’s toxic landfill.

This, the fifth post in a series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods, beginning in 1977 to 1981 with the Jimmy Carter period, will cover the performance of the Government on the environment and climate change aspect of “public purpose.” Posts One, Two, Three, and Four discussed some basic definitions and assumptions of the series and evaluated Government performance relating to economic stagnation, living wage full employment, price stability/inflation, implementing universal health care, and educational reform.

I’ve explained why fiscal responsibility is closely connected to the idea of public purpose, in this post prior to beginning the series. You’ll want to read it, if you want to know what I mean by “public purpose,” and see what else that pregnant term includes, apart from enhancing the environment.

In the first post, I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977, because its fiscal policies have largely worked against key aspects of public purpose. The first 4 posts supported that claim across 5 aspects of public purpose, as will this one. Future posts in this series will attempt to document it across additional aspects of public purpose. Read the rest of this entry →

Real Fiscal Responsibility 4; Carter: Education Reform

6:41 am in Uncategorized by letsgetitdone

If you’re reading this you’ve landed near but not at the beginning of my very lengthy series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods, beginning in 1977 – 1981 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I laid out in this post prior to beginning the series. You may want to consult that post, if you want to know what I mean by “public purpose.” I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977.

In my second post, I began by examining the problems of ending economic stagnation, and providing full employment at a living wage, and, I hope, by showing that the Government, during the Carter period, failed to solve either problem because of its commitment to deficit reduction, and budget balancing, in the service of hoped for inflation moderation. The third post in the series, examined how the US Government failed in its efforts to create and maintain price stability, and also failed to provide a solution to the problem of providing the right of receiving health care to every American in need. So, thus far in the first three posts in the series we’ve seen how the Government during the Carter period failed to 1) end economic stagnation; 2) failed to create and maintain full employment; 3) failed to maintain price stability; and 4) failed to maintain price stability. It did not fail however, to reduce the Federal deficit, which is not in itself an aspect of public purpose, but a presumed means of preserving government solvency, and avoiding inflation. So, I suppose congratulations are due the Government for solving a faux problem and failing to directly address the real ones.

So, from 1977 – 1981, the Government of the United States is thus far 0 for 4 when it comes to achieving real fiscal responsibility through fiscal policy in accordance with key aspects of public purpose. The remaining posts in this series will continue to document the claim that all the US Governments since 1977 have been fiscally irresponsible. In this, the fourth post in the series, I’ll evaluate the Government’s efforts at educational reform during the Carter period. Will the Government go 0 for 5? We’ll see! Read the rest of this entry →

Real Fiscal Responsibility 3; Carter: Inflation and Health Care

6:36 am in Uncategorized by letsgetitdone

Here’s the third post in my series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods beginning in 1977 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I’ve laid out here. I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977.

In my second post, I began by examining the problems of ending economic stagnation, and providing full employment at a living wage, and, I hope, by showing that the Government, during the Carter period, failed to solve either problem because of its commitment to deficit reduction, and budget balancing, in the service of hoped for inflation moderation. The remaining posts in this series will continue to document the claim that all the US Governments since 1977 have been fiscally irresponsible. This, one, the third in the series, will examine how the US Government failed in its efforts to create and maintain price stability, and also failed to provide a solution to the problem of providing the right of receiving health care to every American in need.

Creating and Maintaining Price stability

The Carter Administration sought price stability, and was convinced, mistakenly, that reducing the deficit and eventually balancing the budget would also bring the cost-push inflation in oil prices under control. In the pursuit of price stability, the President used his veto power (p. 40) on a heavily Democratic Congress of supposed allies when he vetoed a public works bill providing for $5 Billion in water projects in 1978, because be thought it was inflationary and full of pork. In addition, he vetoed or pocket vetoed a number of other bills passed by the Democratic Congress in pursuit of smaller Federal deficits and Government frugality.

Not that the Government ran very large deficits in those days in light of current ideas about large deficit spending. In fact, Congress, the President, and the Federal Reserve combined to reduce deficits very quickly after the Ford Administration. After 8 quarters when the Federal Government deficit ranged from 2.88%* of GDP to 6.50%, with 7 quarters exceeding 3% of GDP, the deficit was reduced during the Carter Administration to under 3% of GDP in the first quarter of 1977 and remained in the 0% to less than 3% range, with a low of 0.47%, for the rest of President Carter’s term.

These small Federal deficits were accompanied by small trade deficits by contemporary standards, ranging from a high of 1.21% of GDP to a low of 0.10%. In addition, there were five quarters of small trade surpluses during the Carter Administration, as well. In spite of this generally favorable context, the Government could not achieve price stability because its leaders in all branches were ideologically biased against using the right methods to control the cost-push oil inflation being caused by the spike in oil prices due to Saudi policy during these years. In fact, the Government mostly executed a textbook case of what not to do.

Cost-push inflation cannot be eliminated without killing the economy if one relies on increased taxes, reduced Government spending and high interest rates, which is the deficit hawk prescription. All that will and did do is to move toward macroeconomic and microeconomic austerity. The way cost-push inflation has to be fixed is through bringing alternative sources of supply, wage and price controls, and rationing online.

We know these last two measures are hard to take for Americans and hard to enforce. But they worked during WWII (pp. 95 – 120) even in a time of full employment, and would have worked again if the Congress and the Carter Administration would have employed them sufficiently vigorously. But even though the Administration and Congress did implement wage and price “guidelines” in 1978, and then moved on to tighter controls later, implemented by a Council of Wage and Price Stability, the prices affected were limited in scope, amounting to about half the prices in the economy, and the enforcement of standards wasn’t thoroughgoing, in part because the regulatory staff implementing the program was only 10% of the size of a comparable staff during the Nixon Administration.

As for bringing new supplies online, that is the best cure for cost-push inflation, but the problem with it is that it can take a good deal of time to work. Ironically, Jimmy Carter did initiate this cure for Saudi-induced oil inflation during his Administration, when he de-regulated natural gas production. The problem was that the new supplies did not begin to have an impact for some time. Eventually they did, but only after President Carter was defeated by Ronald Reagan, and only after the availability of more natural gas created an international oil glut, the primary reason for the fall of inflation in the Reagan Administration.

The secondary reason for the fall of inflation was Volcker backing off the Federal Funds rate. The Reagan recovery couldn’t have occurred without that; but, on the other hand, Volcker’s move wouldn’t have been effective if the oil price hadn’t already fallen.

So, the bottom line here, is that the Government did mostly fiscally irresponsible things in seeking price stability during the Carter Administration, while wrapping itself in the moral sanctimony of preaching the necessity for sacrifice. The one clearly good thing it did was to de-regulate natural gas. That eventually worked, and if Congress and the President had combined that with oil rationing and strict enforcement of price controls on domestic supplies, export controls on domestic oil, application of price controls on oil imports, and perhaps limited wage controls, then the economy could have survived without Paul Volcker’s Fed drying up the credit flow and producing a prolonged recession.

Implementing the right of health care for everyone

Carter promised passage of a national health insurance plan during his campaign, but when he was elected he backed off that idea as soon he was warned about the perceived likely inflationary impact of such legislation. This fear dogged his Administration and was a major factor in his inability to come to agreement with Teddy Kennedy and Russell Long on a bill that all three could support.

As his term passed, hesitation and delay resulted in his chance of passing a Medicare for All or other national health insurance bill slipping away, even though he had enormous Democratic majorities in both Houses during his first two years, and healthy majorities in his last two. His fear of inflation and concerns for fiscal responsibility as he defined it, prevented him from making a deal with Democrats supporting a single-payer system. He also insisted that any health reform bill had to safeguard a role for the private insurers.

At the time spending on health care amounted to 9% of GDP. Now that figure is at 18%. In retrospect, it is clear that the same beliefs about fiscal responsibility bothered him in this area as in the economic stagnation, full employment, and price stability issue areas. And also that his insistence on his mistaken fiscal responsibility notion, led to fiscally irresponsible policies, that, in turn, eventually led to the health care sector doubling the proportion of GDP it consumes on an annual basis, and also to many years of unnecessary fatalities, bankruptcies, foreclosures, and family breakups due to lack of universal health insurance.

In retrospect, this is one of areas of the Government’s biggest failures during the Carter Administration. The President was reluctant to make changes that excluded private interests, and to use the Government’s recently acquired greater policy space existing because the Government was now a sovereign fiat currency issuer to spend for the public purpose. His lack of faith in the ability of the Government to do things well, and his ideological faith in the superiority of the private sector to the Government as an agent of change, undermined his effectiveness in this as well as the other areas discussed thus far. It also has bestowed a very high cost on most Americans since 1981.

The Government, led by Carter during this period, could not even conceive of just letting the twin deficits (Trade and Budget) float, and accommodating the trade and import desires of the private sector. Had he been able to do so, he might have been been able to overcome stagflation, create prosperity, and produce low-cost universal health insurance for everyone.

Watch for my next post on the Government’s failure to legislate enduring educational reform during the period 1977 – 1981.

*My thanks are due to Professors Scott Fullwiler and Stephanie Kelton for kindly providing me with their quarterly time series data on Sectoral Financial Balances which I’ve drawn upon for the deficit, and GDP numbers I’ve used in this post.

(Cross-posted from New Economic Perspectives.)

Real Fiscal Responsibility 2: Carter, Stagnation and Unemployment

11:30 am in Uncategorized by letsgetitdone

The economy during the Carter period never operated at full capacity or near full capacity. Deficit and inflation reduction were emphasized above all other domestic concerns, and substantial output gaps were simply accepted as something that it was very difficult for Government to do anything about.

This post continues my series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods beginning in 1977 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I’ve laid out here. I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977. The remaining posts in this series, and they will be many, will document that claim with analysis.

In this second post, I begin my evaluation of the extent of fiscal responsibility or irresponsibility of the Federal Government during the Carter Administration by covering two of the primary problems reflecting public purpose, and what the Federal Government did or did not do about them with its fiscal and monetary policies. The two are: ending economic stagnation, and creating full employment at a living wage.

Replacing a stagnating economy with one operating at its full potential; closing the current output gap

The economy during the Carter period never operated at full capacity or near full capacity. Deficit and inflation reduction were emphasized above all other domestic concerns, and substantial output gaps were simply accepted as something that it was very difficult for Government to do anything about. This was true during a period in which the presidency and the Congress were both in Democratic hands with substantial majorities.

In addition, the President was able to appoint his choice to head the Federal Reserve on two occasions. During the early part of his Administration he was dealing with a Republican appointee, Arthur F. Burns, who was far from a fiscal hawk on inflation. When Burns resigned, Carter appointed G. William Miller to head the Federal Reserve. Miller was, if anything, more dovish on interest rates than Burns. But later when he moved Miller to Treasury, he appointed the fiscal hawk Paul Volcker as Federal Reserve Chairman, and in doing this shot both himself and the United States economy in the foot; condemning himself to defeat in 1980; and the economy to a multi-year recession with high levels of unemployment from 1980 – 1986.

In spite of his favorable political situation (at least until he appointed Volcker) for active deficit spending-based fiscal policy, President Carter and leaders in the other branches of Government chose to emphasize inflation moderation, rather than facilitating an economy that used its full productive capacity for the public purpose. The outcome of this orientation was characterized as “stagflation” in the popular press, and the term came to stigmatize the Carter period in Government and his Administration, in particular.

Why did the leaders of the Congress, the Executive and the Federal Reserve choose inflation moderation above other goals during the period 1977-1981? Partly because President Carter was very serious about attempting to reduce the Government’s deficit, and eventually balance the Federal budget by 1981, and he implemented a variety of Executive Branch cost-cutting measures across the Federal Government to try to reach his goal, while using the power and bully pulpit of the presidency to bring others along the path of “sacrificing for the public good.”.

Congress both collaborated with and sometimes opposed Carter’s cost-cutting proposals, when they related to infrastructure spending. But generally, they supported him in his broad-based deficit cutting activities, because they bought into the fiscal responsibility as deficit cutting and budget balancing notion, and also accepted that as political virtue in a time of uncertainty and stagflation.

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Real Fiscal Responsibility I: Preliminaries

6:25 am in Uncategorized by letsgetitdone

In 1976, Carter ran, in part, on a platform of “fiscal responsibility,” a virtuous “adult” behavior, while also promising to restore full employment. He did not, either during the campaign or afterward, state his policy using today’s neoliberal fiscal responsibility/austerity doctrine.

This is the first in a lengthy blog series that will evaluate the US Government’s record on RealFiscal Responsibility, Administration period by Administration period, since the Administration of Jimmy Carter in 1977. In evaluating the US Government’s record, it’s important to state clearly that I will be evaluating more than just each Administration and its activities.

The record of fiscal responsibility is not the product of the Executive Branch alone. It is the outcome of the interaction of the Executive with the two Houses of Congress and the Federal Reserve System, even on occasion the interaction of one or more of these with the Supreme Court. All bear joint, though not equal responsibility for the record of Government fiscal responsibility or fiscal irresponsibility, as the case may be, during each Administration period.

Why start this series with Jimmy Carter; since, after all, other Presidents before him have been concerned about balancing the budget and deficit reduction? Well, first, such concerns had justification before President Nixon closed the gold window in 1971, and left the United States with a non-convertible currency, with a floating exchange rate, and no debts payable in other currencies. But after that, and with the passage of enough time to give people a chance to understand and digest the significance of that change for increased policy space in the fiscal and monetary areas, it is reasonable to expect that orientations toward deficit spending and balanced budgets among the parts of the US Government should have changed with the change in the realities of the Government financing system.

How much time is enough time for this to happen? That is debatable, of course. But I will assume that given the pressures on them, it is probably too much to expect that the Nixon/Ford Administration could have come to a changed understanding of the newly existing space for fiscal policy. Also, neither of these Presidents appear to have established deficit reduction as a goal, essential in itself for good government, so much as an expedient concern to meet the dual challenges of high unemployment and OPEC-induced inflation. But with Jimmy Carter, we get something new in the post-WWII period.

In 1976, Carter ran, in part, on a platform of “fiscal responsibility,” a virtuous “adult” behavior, while also promising to restore full employment. He did not, either during the campaign or afterward, state his policy using today’s neoliberal fiscal responsibility/austerity doctrine, nor did he trouble to define what he meant by “fiscal responsibility”, and to provide a rationale for his definition, but he appeared to believe, in common with today’s austerians, that 1) achieving small deficits, or, even better, balanced budgets, would create full employment, and also 2) that the public debt-to-GDP ratio needed to be decreased over time to moderate inflation. So, because of this change in orientation and also the fact that he took office nearly 6 years after Nixon dispensed entirely with the gold standard, it seems to me right to view him as the first modern president who could reasonably have been expected to figure out that Real Fiscal Responsibility isn’t a matter of reducing deficits or balancing budgets, but rather of spending or taxing for the public purpose, and to have acted accordingly.

The same goes for the heavily Democratic post-Watergate Congress that served along with him, and the Board of Governors of the Federal Reserve. All had enough time to figure the new reality out, all were responsible for not taking advantage of the new fiscal reality in which they live. But they didn’t take advantage of it; instead they acted with fiscal irresponsibility; as year after year, up to the present, has every succeeding President, Congress, and Federal Reserve. And in so doing, they have made themselves, every government of the United States since 1977, responsible for the decline of economic, social and political equality, and repeated episodes of economic stagnation the United States has had since that time.

fiscal sustainability is:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purpose, and

fiscal responsibility is fiscal policy intended to achieve public purpose while also maintaining or increasing fiscal sustainability.

Proceeding from these definitions, and also a specification of public purpose you will find here, it may be fiscally responsible, in theory, to both implement fiscal policy based on its expected economic impact while also targeting managing the size of the deficit, the public debt, and the debt to GDP ratio; but, only in cases where an economic system is using a currency that it cannot issue in unlimited amounts to maintain its solvency. That includes all economic systems using currencies that are convertible to a commodity, or systems whose political authorities peg the value of its currency to the currency of another economic system, or systems whose political authorities have adopted a foreign currency. But it doesn’t include those systems whose political authorities (including central banks) can issue their own currency and reserves at will; more formally, systems with convertible fiat currencies, floating exchange rates, and no debts in currencies they do not have the authority to issue.

These last economic systems, fiat currency sovereigns such as the United States, the United Kingdom, Japan, Canada, and Australia, to name several, have no need to target the levels of public debt or the debt to GDP ratio to maintain fiscal sustainability, and only need to be concerned about the deficit if it grows large enough in a single time period to impact an important component of public purpose such as the inflation rate. For these nations, in fact, it is irresponsible to target levels of public debt, and the debt-to-GDP ratio, and in any way to prioritize or trade-off changes in these levels over fiscal policy impacts on full employment, price stability, health and well-being, environmental sustainability, climate sustainability, energy foundations, educational attainment, public facilities, or any of the other components of public purpose, since no fiscal sustainability goal would be served by doing so.

Indeed, the opposite is the case, since the sustainability of the capability to freely issue fiat sovereign currency and reserves without undesirable effects such as hyperinflation, depends on the continuing productive capacity of the economic system whose political authorities are issuing such a currency. It is only when such systems have or can easily generate the goods and services needed to meet demand generated by Government deficit spending that the full freedom of such systems to spend in order to respond to economic cycles and to adapt to other problems can be realized. So, one of the most fiscally irresponsible things a Government can do is to target deficit reduction and budget balancing at the expense of maintaining and expanding productive capacity, including both the constructed capital providing that capacity and the competencies, skill, and knowledge, of the human beings who can use it to generate goods and services.

And yet, in pursuing Government austerity through policies targeting deficit reduction and budget balancing, that is what most Governments having fiat currency systems have done since shortly after the world followed the United States and went entirely off the gold standard in the 1970s. In particular, by almost never achieving full employment and by, instead, using an unemployed buffer stock as a hedge against inflation, they have frequently damaged and wasted skills, competencies, and knowledge of their own citizens who want to work, and have decreased real national wealth compared to what might have been created.

In this series, I’ll analyze and evaluate in detail each Administration period since 1977, from the viewpoint of fiscal responsibility I’ve defined above, and relative to the specification of public purpose I’ve outlined here, and will use in each blog. Readers may not agree with my specification of public purpose and so may disagree with my evaluation. But I think there is less room to disagree with the idea that Government taxing and spending in a democracy ought to align with some specification of public purpose, rather than aligning with mere private purposes of elites. So, it remains for those who will disagree to offer their own ideas of public purpose and then explain why these require the kinds of deficit reduction, budget balancing and austerity policies that each US Government, to lesser or greater degree, has pursued since 1977.

(Cross-posted from New Economic Perspectives.)

Bernie Sanders: Self-shackled Champion of the People

1:48 pm in Uncategorized by letsgetitdone

I gotta love Bernie Sanders, because he seems so much like people I grew up with and like myself too, and he also seems to have that passion for equality and democracy that is so important for the future of America. Sometimes I think Bernie is one of the few champions of the people left in Congress. But I also think that along with other progressives he has constructed chains for himself that prevent him from being as effective a champion of the people as he otherwise might be.

His chains are the chains of either false beliefs or a decision not to speak the truth about fiscal matters for fear that the “very serious people” in the Washington village will marginalize him even more than they do right now. I can’t say which of these is true, but I think whichever reason is operative, his self-shackling hurts his effectiveness.
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Dick Durbin Insults Everyone Else’s Intelligence About Social Security

3:33 pm in Uncategorized by letsgetitdone

Yesterday on Fox, Senator Dick Durbin said:

WALLACE: I’m going to talk about ObamaCare on a second, but you’re not answering my question. Why does taxes — why do taxes have to be on the table? Why can’t you just make a deal, short-term spending for long-term entitlement reform — which, Senator, you support and President Obama support. You have supported the idea of some entitlement reform.

DURBIN: That’s right. I do, and I’ll tell you why — because Social Security is going to run out of money in 20 years. I want to fix it now, before we reach that cliff.

Medicare may run out of money in 10 years, let’s fix it now. And that means addressing the skyrocketing cost of health care. That’s what ObamaCare is focused on, and yet, the Republicans want nothing to do with it.

If we don’t focus on the health care and dealing with the entitlements, the baby boom generation is going to blow away our future. We don’t want to see that happen. We want to make sure that Social Security and Medicare are solid.

The “. . . may run out of money. . . . ” and “. . . dealing with entitlements. . . “ memes, in reply to Chris Wallace’s question suggests that a deal trading increased revenues for Social Security and other entitlement cuts is acceptable to him. So, Durbin’s argument is that because Social Security Trustee and CBO projections, based on very pessimistic economic growth projections for the whole period, show a shortfall in the Social Security “Trust Fund” in 20 years, it is acceptable to make entitlement cuts now if the Democrats can get increased revenue from higher taxes, as if entitlement “reform” were the only way to meet the perceived Social Security solvency problem. But who would it be acceptable to? Read the rest of this entry →

Lavoie’s Critical Look at Modern Money Theory: A Reply

5:38 pm in Uncategorized by letsgetitdone

In October 2011 Marc Lavoie, a post-keynesian economist, very friendly to Modern Money Theory (MMT) wrote a paper presenting a friendly critical look at MMT. In his conclusion, Lavoie states that “. . . the neo-chartalist analysis is essentially correct . . . “ affirming his substantial agreement with MMT’s analysis of banking operations and fiscal realities in nations with non-convertible fiat currencies, with floating exchange rates and no debts in currencies they do not issue, as well as MMT’s analysis of Eurozone viability. But he goes on to say (p. 25):

“There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; That government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.”

So, Lavoie questions the wisdom of MMT economists and writers making certain counter-intuitive statements he perceives as certainly questionable, perhaps untrue, and also confusing to people, economists and decision makers trying to understand MMT writings. He considers these statements an important barrier to understanding, and he wants this ‘baggage’ to be discarded because he thinks it hurts MMT and post-keynesian efforts to get important new approaches to economics accepted.

Recently, Lavoie’s work was used in a very vigorous and important discussion at Rodger Malcolm Mitchell’s Monetary Sovereignty web site by a commenter named “Tom,” questioning some of Rodger’s formulations and the statements of other commenters who defended the MMT and MS positions. I participated in the discussion, but also concluded that it would be more useful to write a more formal reply to answer Lavoie’s question of what is gained by taking some of the positions MMT and MS writers often take. This is my reply.

The Consolidated Government Assumption

Well, let’s set the parameters of this discussion. When MMT writers refer to the Government, they don’t mean just the Executive Branch or the Treasury. They include in “the Government,” the whole central government including the Congress, the Supreme Court, and the so-called “independent agencies” including the Federal Reserve — the Central Bank of the United States. Now, there is wide disagreement about whether the Fed, comprised of its Board of Governors, the Federal Open Market Committee (FOMC), and the Regional Fed Banks are a Government agency. I won’t try to resolve those disagreements in this post. I’ll just assume for purposes of this discussion that the system comprised of these institutions and their interaction as created by the Congress, is part of the Federal Government under the full authority of the Congress to regulate.

Whether this is right or not is disputable, and I’m sure some of my friends among the commenters will dispute it. But, what is not open to dispute is that when MMT writers make the claims attributed to them by Lavoie, this is what they are assuming. So, if one wants to refute these claims he or she must argue against the basic assumption, or failing that one must critique the MMT claims by first stipulating to that key MMT assumption, for the sake of argument.

Lavoie disagrees with the MMT assumption that it is useful to see the Government, especially the Treasury and the central bank, from a consolidated point of view for purposes viewing the reality of fiscal operations. He does not dispute this by claiming that the central bank isn’t part of the Government, and in my view he presents no compelling argument why the MMT conceptual consolidation of the Government and the central bank is incorrect; but, in spite of this he opts to view the Government and the central bank as separate entities because he finds that view more illuminating for his own analytical purposes.

He’s entitled to do this, of course. But, in evaluating his view that MMT gains little or nothing from various statements it makes, I think one needs to keep in mind that what is gained may look different if one accepts the consolidated Government point of view than if one doesn’t. Now, let’s get to each of the MMT claims Lavoie questions and try to answer his question about what is gained by asserting them.


“Government can spend by simply crediting a bank account;. . . ”

I think MMT economists and writers point this out because it is true, provided that all parts of the Governmental spending system are aligned. That is, if spending is appropriated by the Congress and the Federal Reserve banking agent of the Treasury places the reserves in the Treasury General Account, then the Government can, and most often currently does, spend by crediting private sector bank accounts. So, the question now becomes what is gained by simplifying the above explanation into the short claim above?

And the answer is that MMT wants people to know that their Government, as a whole, can spend freely if it wants to, because if MMT can convey that message to people, then they will be in a position to deny the claims of the austerity-mongers that the Government just doesn’t have the money and cannot get it, because it must either tax or borrow, and then face inescapable “funding” constraints on both options. If we could get to the point of public recognition that such a claim is false, then that would be a great, enabling, political gain in the fight for MMT-based policies.

Looked at in other words, MMT writers see the power of the austerity position on fical policy in its claim that “There Is No Alternative” (TINA). The idea that the Consolidated Government spends by simply marking up accounts creating its fiat money in the private sector is a powerful one in beginning to make the case that “There Are Good Alternatives” (TAGA) to austerian fiscal policy.


“. . . government expenditures must precede tax collection; . . . “

MMT doesn’t exactly say that. What it says, as Lavoie recognizes in his detailed analysis in the paper, is that from a logical point of view there has to have been government spending of the currency unit of choice allowing people to accumulate that currency, before it can be used to pay government tax obligations. That doesn’t mean that MMT is saying that government spending must precede tax collections on any given month, or given day, or given year. As Stephanie Kelton puts it in her account of the way in which deficit spending creates net financial assets:

“As we in the MMT tradition consistently insist, spending must, as a matter of logic, precede taxation in the first instance (for it would be impossible to collect dollars from the private sector unless they had first been spent into existence by the public sector). But in the real world, the Treasury receives tax payments on a daily basis, and government checks are clearing bank accounts on a daily basis as well. So there is really no objective beginning point or ending point. You can begin with spending if you prefer. But it will not alter the result.”

So, I think Lavoie has overstated this MMT claim. If he doubts the validity of the claim made as a point of logic then I think it’s up to him to explain how people can have the currency needed to pay taxes without the Government, in the MMT meaning of that term, spending in the first place to originate the process of establishing the legitimacy and value of the currency.

“. . . the creation of high powered money requires government deficits in the long run; . . . “

High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation. MMT writers simplify a bit when they they say “the creation of high powered money” rather than “the net creation of high powered money” but I think it’s easy to excuse the simplification since the word “net” tends to make people’s eyes glaze over, and much MMT writing is an attempt to communicate with the broader public, rather than just other economists.

Lavoie seems to think that net high powered money creation isn’t necessary for an economy, even if it is good to have. He says:

“While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash. Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector.”

Of course, it’s true that the central bank can provide money to the private sector through lending and asset swaps; but this kind of money creation is not net money asset creation unmatched by a corresponding liability. So, all it can do in the long run is to produce unsustainable credit bubbles that will periodically crash the economy, rather than net money asset creation, which can support the continuous creation of real wealth.

The gain in using formulations like the one Lavoie critiques is that these and related expressions provide a counter to the conditioning of people to the idea that deficits are somehow a negative state that ought to be avoided as much as possible. Lavoie is certainly no opponent of deficit spending, but I think perhaps, he’s not giving deserved recognition to the difficulties MMT economists have been having in fighting the world view of austerity that looks at deficits as overwhelmingly negative states that ought to be minimized and eventually avoided. A negative view of deficits as immoral is fundamental to the austerity posture in fiscal politics. If we can get people to agree that deficits are necessary for nominal wealth accumulation in the longer run, then we will greatly weaken the negative view of deficits that is so important to austerians.


“. . . . central bank advances can be assimilated to a government expenditure; . . .

I’m not sure what Lavoie has in mind here. It’s not clear to me what he means from the analysis in his paper, and I’ve never seen an MMT writer say anything like the above statement.


“. . . taxes and issues of securities do not finance government expenditures. . . . ”

Lavoie wonders what is gained by a statement like this after he has shown through an analysis using T-accounts that the Treasury borrows from the private sector when it needs to deficit spend. Then he says (p. 18):

“The purpose of this whole exercise is to show that there is no point in making the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency. Even in the case of the US federal government, securities need to be issued when the government deficit-spends, and these securities initially need to be purchased by the private financial sector. It seems to me that the consolidation argument – the consolidation of the central bank with the government – cannot counter the fact that the US government needs to borrow from the private sector under existing rules.”

However, it’s just not true that the Consolidated Government needs to borrow from the private sector to deficit spend under existing rules. Here are four reasons why this is not so.

First, “existing rules” include the Constitution of the United States which states the most fundamental rules of all for the Consolidated Government. Article One of the Constitution provides Congress with the authority to create money without limit and to appropriate spending with or without borrowing. That authority is a fact. And it is important for people to recognize that any constraints on the authority to create money without issuing debt instruments that may exist in current practices are, as MMT says, self-imposed constraints.

Second, apart from existing constitutional authority to delegate authority to the Treasury to spend without borrowing, there is also the fact that in addition to those rules that appear to constrain the Treasury component of the consolidated Government to only taxing and borrowing to deficit spend, there is also legislation that allows the Treasury to coin money, deposit it at the Fed, force the Fed to provide reserves in return for that deposit, and proceed to have the seigniorage revenue resulting from this process “swept” into the Treasury General Account (TGA), the spending vehicle of the Federal Government.

Seigniorage has always been a relatively minor source of reserves for Treasury. However, an act passed in 1996 provides the authority to mint platinum coins of arbitrary face value to use in the process of gaining seigniorage. Face values on these coins can be in the many trillions of dollars and can fill the public purse to arbitrarily high levels. These reserves can only be spent on Congressional appropriations and repaying Federal debts and interest due, so this capability doesn’t take away the purse strings from the Congress. But it does make Lavoie’s claim that the consolidated Government needs to borrow from the private sector to deficit spend under existing rules untrue; even overlooking the constitutional authority of Congress to amend current constraints on the Treasury’s ability to generate reserves “out of thin air.”

Third, there is the issue of whether the Treasury is really borrowing money, when it issues debt instruments in return for the Consolidated Government’s own fiat. MMT economists often point out that when the Government “borrows” money it is not like you or I borrowing money. Yes, the Government must repay in both cases, and in both cases the term ‘debt’ is used. But, a) the Government’s debt is more like the liability of a bank to its depositors, than it is like the liability you or I might have to the bank.

The Government, in selling its debt, is functionally providing the equivalent of a time deposit opportunity to depositors, rather than borrowing money from people who are incurring a risk that they won’t be repaid. In fact, the Government’s “time deposit” carries the same risk with it that a “time deposit” placed in a bank does, since it is the Government that insures such deposits.

And b) what sort of ‘debt’ is it that provides no burden at all on the borrower and pays a return to the lender without exposing that lender to risk? It certainly isn’t like a ‘debt’ that you and I or any user of a currency incurs. The reason is that the power and authority of the consolidated Government to create reserves is unlimited, so no matter how circuitous the process of generating those reserves may be, the issue is never in doubt. The Government can always create the reserves it needs to repay its debts. And under the 14th Amendment, to the US Constitution, section four, the US cannot default on its ‘debts.’

Fourth, “the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency” is true if one considers carefully the term “finance.” When you or I have to “finance” our spending we must do it from money we acquire from others through our economic activity including our lending. But, the Consolidated Federal Government in the end creates money from the Fed’s power to generate reserves, and the Treasury’s (US Mint’s) power to generate currency (ordered by the Fed) and coins.

The Treasury may tax and borrow as an important part of its spending operations, but that doesn’t mean that it is the Consolidated Government that ultimately “finances” these spending operations through these measures. The Treasury may use these measures plus seigniorage to generate the reserves that end up in the TGA; but the Consolidated Government, viewed as whole, ultimately enables and facilitates the Treasury’s spending through exercising its collective authority to create reserves by fiat in the TGA in response to Treasury’s tax, debt instrument sales, and seigniorage-producing activities. It does not “finance” its spending in the manner we normally associate with the term “finance.”

So, what do MMT writers gain by claiming that the Consolidated Government doesn’t ”finance” deficit spending by “taxing” or “borrowing?” I think the answer is that we continue to underline the central point that governments sovereign in their own currency have no solvency concerns, because they have an unlimited capability to generate nominal wealth. This point is very central to both MMT and MS, because it implies that austerity is an untenable position in fiscal policy, and that the whole litany of neoliberal concerns about the sky falling someday because the Government is running out of money is just a fairy tale.

This point is where the action is politically, and much of the effort of MMT and MS writers is devoted to demonstrating it in various ways, and underlining it again and again in order to overthrow the neoliberal paradigm of economic thought. I think that overthrow is our main messaging objective, and that objective is served by the various counter-intuitive statements that Lavoie views as “baggage” MMT ought to get rid of.

For my part, I think these statements are both true and also important in creating our alternative paradigm. Paradigms advance by creating cognitive dissonance in those who accept the old paradigm or who are neutral in relation to that paradigm. That is, I think, exactly what we are doing.

And out of that dissonance we are beginning to see change. Let us hope that we will see that change accelerate over the next few years so that the world and its various nations will be able to end the global move toward plutocracy, and a new feudalism that is gradually impoverishing the middle class and ending the hope brought by freedom and democracy everywhere this new feudalism advances.

(Cross-posted from New Economic Perspectives.)

What Social Security/Medicare Solvency Problem?

8:56 pm in Uncategorized by letsgetitdone

For years now, economists using the ideas of Modern Money Theory (MMT) have been telling us that the so-called long-term “funding” problems of Social Security (SS) and Medicare emphasized incessantly by supporters of austerity are faux problems. The MMT economists believe this because the US is a currency issuer of a non-convertible fiat currency, has a floating exchange rate, and incurs no debts in any currency except US dollars. So, the US Government can issue whatever financial resources it needs to carry out its obligations without raising any solvency issues. The only problems involved in carrying out these obligations are problems of political will, not problems of financial incapacity, which is why, from an economic point of view, they are faux problems.

There are other economists who also believe these are faux problems, even though they don’t subscribe to the view that the government can’t become insolvent. They also view them as problems of political will because they think that the SS long term “solvency” issue can be easily solved by Congress just by lifting the payroll tax cap on income; while the problem of rising health costs threatening long term Medicare “solvency” is easily solved by passing a Medicare for All bill such as HR 676, which creates a single-payer for most health care services and puts the private insurers out of business, while holding down provider costs through negotiations.

Still other economists and fiscal policy analysts, believe, or say they believe, that the Federal Government does have fiscal limits, that the Government can only fund activities through taxing or borrowing, that deficit spending must be avoided or kept to a low level because it corresponds to growth in public debt, which will eventually create spiraling interest rates in the bond markets leading to financial insolvency for the United States, or at least to very damaging periods in which the US must impose extreme austerity on its citizens and forgo economic growth, because it must, at all costs, reduce its public debt substantially, and in short order.

These “austerians” suggest that this last fate be avoided by cutting deficits now, and, even more, by implementing long term deficit reduction plans that cut entitlements. Since the passage of the stimulus bill in 2009, the counsel of austerians of varying degree has dominated the US Government leading to conflicts among some who want to lower deficit spending to extreme levels and others who want to lower deficits more gradually and to levels a bit higher than their “starve the beast” opponents. Despite conflicts among them, the austerians have, through a few rounds of “debt ceiling,” fiscal cliff,” and “sequester” conflicts managed to implement considerable deficit reduction with serious costs to the economy and efforts to decrease unemployment substantially.

This conflict has created the present situation where the sequester and recent increases in Social Security taxes have set the stage for a “grand bargain” that would begin deep cuts in entitlements by implementing the Administration’s “chained CPI” proposal. But, a number of things have now happened to slow down the austerity train and even threaten its derailment.

Reality, the Austerian Retreat, and Entitlements

The first of these things has been the record of austerian deficit reduction efforts from 2010 to the present. The impact of austerity on economies the world over has been abysmal. Unemployment in many economies, including many of the Eurozone nations is now at levels not seen since the Great Depression, and in is even higher in some nations, especially among younger workers. In addition, in many nations brutal cuts in government spending have only increased deficits and debts while creating greater unemployment.

Nations like Canada, Australia, New Zealand, and the US, which haven’t implemented extreme austerity after initial stimulative reactions to the crash of 2008, but also have put in place efforts at deficit reduction in response to increasing influence of the austerians, haven’t suffered as much as other nations that have implemented full bore austerity. But they have suffered losses in employment and economic slowdowns as a cost of lowering deficits. The UK, which like the US, could have chosen to be less aggressive about deficit reduction, instead elected a Conservative-Liberal coalition that bought into the dogma of “expansionary austerity” and created a declining economy suffering periodic dips after the initial recession.

Second, the intellectual underpinnings of austerity have recently taken a big hit from academic studies showing spreadsheet errors, and various other errors in analysis, in the major academic studies supporting the idea that public debt-to-GDP ratios cause slower GDP growth. More and more analysts and observers now seem to believe that it is likely that low growth causes high public debt, rather than the opposite belief, which had fueled the austerity efforts of politicians and government officials.

Third, in the United States, the deficit reduction outcomes of Congressional/ Executive conflicts, while reducing actual deficits somewhat, have reduced projections of future deficits even more, and are perceived as both having reduced actual deficits and as holding back economic recovery. So, political sentiment has been gradually building against additional austerity efforts. There is now much opposition to further deficit reduction including opposition to proposals providing for entitlement cuts. And there are claims from progressives that “austerity is dead,” and advocacy that we should no longer make deficit reduction the centerpiece of fiscal policy but should immediately shift to an emphasis on creating jobs.

This past week saw a recent important defection from the ranks of advocates for austerity. The Center for American Progress (CAP) published a report by Michael Linden which concludes:

What does it mean to reset the debate? First, it means starting from the understanding that there is no longer a looming fiscal crisis—if there ever even was one. . . . .

Second, resetting the debate means discarding other fiscal theories that have fared poorly over the past several years. . . .

Third, we must recognize that there are costs to elevating deficit reduction above all other concerns. . . .

and:

. . . . we can no longer afford to pretend as if the benefits of deficit reduction always, in all circumstances, outweigh the costs. And we cannot allow the continued perception of a deficit-reduction imperative to prevent us from fixing the sequester and avoiding more economic damage.

It is time to reset the entire budget debate. No more pretending that the sky is falling. No more rash actions to cut the deficit without regard for real-world impacts. No more calls for an ever-elusive grand bargain. No more super special committees or draconian automatic punishments intended to force action. Improving our national finances is still an important goal—that has not changed. But so much else has, and the debate must change too.

It is good to see this beginning of wisdom, and even implied opposition to entitlement cuts, in a report from an organization with direct lines to the White House. But it’s important not to mistake this report, with its fine rhetoric, for actual opposition to the Federal Government continuing to pursue an inadequate level of deficit spending to simultaneously contain the growth of debt while somehow creating substantially lower levels of unemployment than we have now.

Progressives and Centrists like CAP still don’t understand that austerity is destroying private sector net financial assets by cutting government spending and/or raising taxes in such a way that Government additions of net financial assets to the non-government portions of the economy (government deficits) fall to a level low enough that they are less than the size of the trade balance, whether in deficit or in surplus. Right now the trade deficit is 3.5% of GDP. That means Government deficits must be at least 3.5% of GDP to prevent contraction in net private sector financial assets. That’s a roughly a $560 B deficit in 2013, just to remain in place. CBO’s latest projections are for a deficit of $642 Billion this year, a bit higher than break even; but not by very much. The deficit could well be smaller than that, however, since it’s dropping fast.

If the economy recovers further, it’s likely that the trade deficit will grow larger as a proportion of GDP. If the Government deficit isn’t allowed to grow, then the result will mean declining net financial assets and greater inequality since the scramble for declining net financial assets will favor the economically well-positioned over most of the rest of us.

The question is: will the progressives and centrists who have had enough of austerity be ready to run deficits large enough to both compensate for the trade deficit and also allow enough saving of net financial assets to fuel renewed aggregate demand and the growing consumption needed for an expanding economy? Since deficits large enough to do both might range anywhere from 6 – 10% of GDP or more, I doubt that they will be up for that, because despite their protestations about leaving austerity behind, their de-emphasis on deficit reduction doesn’t mean they’ve abandoned their fear of increasing debt-to-GDP ratios, or their belief that high debt-to-GDP ratios are hurtful to economies.

In fact, a recent “austerity is dead” post at Think Progress (a project of the Center for American Progress Action Fund) in advocating for Michael Linden’s recommendations to repeal the sequester at least for the next few years, and invest $82 Billion (roughly 1/2 of 1 percent of GDP) on “pro-growth investments” to create jobs, cites the CBO projection favorably that shows the deficit falling sharply right now, and falling below 3% annually in 2014 and staying below that level until 2019.

But that projection is actual government austerity from now until 2019, barring a substantial decrease in our trade deficit over that period. Also, if there’s no private credit bubble during this time, it’s very likely that the economy will do nothing but stagnate until 2019 and beyond. We are looking at a Japanese “lost decade” scenario for the US economy.

And most “progressives” don’t see it because while they joyously proclaim that “austerity is dead,” they also, with equal joy, plan for austerity-level deficits of 3% or less for the foreseeable future. Now hear this CAP, Campaign for America’s Future, and other “village” DC/New York progressive organizations: Warren Buffett’s 3% deficits are the very essence of austerity, as the Eurozone well knows.

Make no mistake about that. So, when you tell us that “austerity is dead,” please don’t tell us at the same time that you’re planning to maintain deficits at the 3% level or below, and with them austerity for the indefinite future.

And how about the more determined austerians? What do they think about the death of austerity? Well, generally, they don’t believe it. They still hold that high debt-to-GDP ratios are problematic for growth. And while they’re now willing to grant that it may be wise to back off deficit reduction somewhat in order to emphasize job creation a bit; austerians like the Peter G. Peterson Foundation, and the Washington Post editorial writers, are still persuaded that now is the time to pursue arrangements for long term spending reductions in Social Security and Medicare entitlements. So, for them, and for the White House, pursuit of a “grand bargain” is still not off the table that the President has so persistently set, since at least the beginning of 2010.

In brief, the hard-core austerians still believe that deficits and the GDP ratio are very important and must be reduced even at the cost of considerable economic pain for those who aren’t wealthy. Given their view, it’s unwise for people who really think that austerity is, or should be, dead to relax now, because it’s a good bet that if the austerians can make a deal with the Republican right to reduce entitlement spending, then they will do just that, and also spring their deal on Congress suddenly and at the last moment.

The No Debt/No Inflation Platinum Coin Solution to the “Long Term Entitlement Solvency Problem”

So, let’s address a solution to the long-term entitlement spending solvency problem that really kills austerity for entitlements dead. Of course, it’s a faux problem in the sense that there is no economic or financial solvency problem, since the Federal Government can never involuntarily run out of money to pay Social Security and Medicare obligations, as long as Congress is willing to provide the authority to meet those obligations. But there is a real political problem in that Congress may decide not to do that because spending on entitlements in future years may exceed FICA tax revenues year after year until “the trust funds” cannot “cover” the deficit between annual tax revenues and annual spending.

The austerians want to solve this political problem by cutting back on entitlement benefits. “Progressives” want to solve it by eliminating the income cap on FICA taxation. The advantages and disadvantages of both solutions are very well-known so I won’t repeat them, but will just point out that both will subtract net financial assets from the economy, and offer a third solution that doesn’t have that problem.

That solution is for the Executive Branch to use its Platinum Coin Seigniorage (PCS) authority under 31 USC 5112(k) and 31 USC 5136 to mint a single proof platinum coin each year to cover any shortfall between FICA revenues and spending on Social Security and Medicare. If that were done annually in advance, based on projections, then there would be no further depletion of the “trust fund” credits, and no further political issue of Social Security and Medicare insolvency.

This solution also has at least the following other advantages.

– It requires no Congressional action to implement. The necessary authority is there already;

– It will not increase spending, beyond that already scheduled for Social Security and Medicare, so it won’t add any inflation beyond that already built into the system;

– It will not increase the public debt subject to the limit, so that worry needn’t trouble people;

– It will educate people about the fact that the Government can spend without having to tax or borrow if it needs to do that;

– It will educate people about PCS as an alternative to taxing and borrowing;

– It will educate people to the idea that neither the Treasury nor the Government can become insolvent because it can always mint coins;

– It will educate people about the fact that the US Government need not ever borrow back its own previously issued currency from anyone else, unless it wants to;

– It will educate people to the idea that their grandchildren won’t have a burden of public debt that they can’t always easily pay back by using PCS;

– It requires neither an increase in taxes nor cuts in Social Security or Medicare benefits.

– Also, if benefits were increased in the future there wouldn’t need to be any tax increases to “fund” them.

– It would be a great political success for any President who did this, because it would have the effect of safeguarding the major components of the safety net for good, and that President would be remembered by a grateful populace for having done that.

There are, of course, some disadvantages to this third solution, too.

– The opposition to the President will attack she or he for using PCS, claiming that it is the dreaded “printing money,” practiced, so infamously, by the Weimar Republic and Zimbabwe. This may be an effective attack in holding down the President’s approval rating for a limited period of time; but once people observe that no inflation results from using PCS, this attack will fade away; it’s effectiveness destroyed by experience and reality;

– To make PCS effective, the President may have to force the Federal Reserve Chairman to create reserves in exchange for Treasury’s platinum coins. This may create a firestorm politically if the Fed Chairman resigns in protest. However, eventually, the President will find a successor who will credit the Mint’s Public Enterprise Fund (PEF) account for platinum coins with very high face value, because the law is clear that in cases of disagreement between the Fed and the Secretary on matters of interpretation, the opinion of the Secretary is to prevail.

– The opposition may attack the President for “grabbing more power.” This may make a few headlines; but since the President’s action would halt any further depletion of the Social Security and Medicare “trust funds” it is hard to see the public either disapproving of the action, or getting motivated by any perceived power grab.

– The opposition to the President in Congress may become enraged by the loss of leverage against entitlement spending they experience as a result of the Administration using PCS to stop depletion of the “trust funds.” However, I can’t see this anger going anywhere unless it somehow gets extended to the country at large. But, then again, the only reason why most people would get angry at this is if inflation were somehow triggered using PCS. Since this is a very unlikely prospect, the anger in Congress will just go to ground in the sweep of events.

Two weeks after the minting each year, there will be other issues to fight about. After a few years of use, PCS will be institutionalized as the way to ensure the sustainability of Social Security and Medicare regardless of fluctuations in the economy and in tax revenues.

So, that’s it. Using PCS to cover the shortfall between entitlement spending and FICA revenues is a quick and relatively easy solution to the political problem of ensuring that the Social Security and Medicare “trust funds” are sustainable, provided that a president will use it. When will this, or the next, or the next president make this happen and really kill “austerity” politics targeting the entitlements that most Americans love so well? When will this or some future president hear the voice of the people?

(Cross-posted from New Economic Perspectives.)