You are browsing the archive for Fed.

The Small Ball Trillion Dollar Coin Seigniorage Exception

12:07 pm in Uncategorized by letsgetitdone

The exception to the general pattern focusing on the Trillion Dollar Coin (TDC) as the solution to the debt ceiling problem I outlined and critiqued in my last post, is in Joe Wiesenthal ‘s posts here and here. Wiesenthal alone criticizes, rather than ignores, other options than the TDC, namely the $16 T and $100 T options, on grounds that they are no more effective at meeting the debt ceiling crisis than the TDC. He says that the issue is not a lack money but the debt ceiling law, and also that if a coin that large were minted and used to pay back the debt, then the result would be inflation or hyperinflation because of the flow of the large quantity of reserves into the economy, and the ensuing great expansion in the money supply.

I think that Joe Wiesenthal is both showing his bias towards solving the smaller, more immediate (debt ceiling), rather than the larger (austerity) problem, and also that he’s dead wrong about the impact of a $100 T coin on inflation. On his bias: I can only say, that I don’t agree that “we” are talking about a legal problem rather than a money problem.

If all “we” are concerned with is the debt ceiling, then Wiesenthal is right; we need only consider the TDC option, which the President can use either once, or until the House gets tired of his minting TDCs, and raises the debt ceiling. But I think that most Americans, if they understood Platinum Coin Seigniorage (PCS) and its possible meaning for fiscal politics would go beyond debt ceiling concerns to the issue of austerity. And they would also realize that the face value of the PCS option chosen by the Secretary of the Treasury is of enormous importance for removing any perceived need for austerity arising from the level of the national debt or the debt-to-GDP ratio.

Wiesenthal’s main additional stated objection to extremely high value PCS on the order of $50 – $100 Trillion is the inflationary impact he expects it to have. I’ve already analyzed the likely impact of a $60 T coin on inflation in a fair amount of detail in an earlier post, based on Scott Fullwiler’s comprehensive framework. My analysis shows that there would be no inflation due to the effect of $60 T PCS itself on the economy. I can summarize the argument this way.

The credits in the Treasury General Account (TGA) ultimately resulting from using $60 T PCS aren’t immediately spent. So, they don’t all enter the economy immediately, but over a very long period of time from 15 – 25 years in duration. So, to gauge the inflationary impact, you have to analyze when and how the credits would be entering the economy. At the end of the last fiscal year, $6.4 Trillion in debt subject to the limit was owed by the Treasury to other agencies and to the Fed itself. That debt could be redeemed in the same week after minting a $60 T coin. But the payments wouldn’t be inflationary because they would not enter the non-government economy. Nevertheless, these payments would cut back debt subject to the limit by close to 40%, because of the ridiculous quirk in the law that counts intra-governmental debt toward the debt ceiling.

Next, the 10 T or so of debt held by private corporations, individuals, and foreign governments would only be paid as it falls due. Much of it would be paid over the first three years. But as I’ve argued above, the additional reserves placed in the system by paying the debt, and not issuing new debt instruments would be less inflationary than bonds would be.

Also, their presence in the banking system, would clearly flood it with reserves and drive overnight interest rates down to zero, rather than raising them. For the Fed to hit any non-zero rate targets it would have to support them either paying IOR, or issuing debt instruments of its own to drain the excess reserves. In either case, there’s no inflationary impact from repaying debt instruments as they fall due by adding reserves to the banking system.

That leaves deficit spending. In the case of a $60 T coin, and a national debt of $16.4 Trillion, we’ll assume that $43.6 Trillion would be left in the TGA for future deficit spending. However, the fact that the credits are in the TGA doesn’t mean that the Treasury could spend them. In fact, it can only spend them if Congress appropriates deficit spending. So, the bottom line is that the $43.6 T doesn’t go into the economy until it’s appropriated. Then some portion of it can be inflationary if Congress deficit spends past the point of full employment; but if it doesn’t, then there won’t be demand-pull inflation. And, if it does, then the inflation will be due to unwise Congressional appropriations and not to using PCS.

In short, there’s no way that PCS in itself can have an inflationary impact, no matter how high the value of the platinum coin is. That’s because repayment of already held debt is less inflationary than continuous rollover of and gradual increase of debt, repayment of debt to government agencies including the Fed doesn’t enter the economy, and using PCS-generated funds to cover deficits is not in itself inflationary unless deficit spending is so large that it continues past full employment.

So, that’s the true narrative about PCS and inflation. Not, ZOMG “Weimar, Zimbabwe.” That’s nonsense! Let’s hope that Joe Wiesenthal, and other MSM bloggers who have jumped into the PCS pool in the past few weeks read it and cease to spread “the silly idea” that PCS, in whatever denomination greater than say a few Trillion Dollars may be used, is inherently inflationary. It is nothing of the kind! Inflation, due to Government spending, is always and everywhere, in the rare instances that it occurs, a Congressional phenomenon!

(Cross-posted from New Economic Perspectives.)

Photo in the public domain.

Wake Up Progressives: The Bad Guys Are Trying To Steal the Trillion Dollar Coin to Save the Financial Status Quo!

8:53 pm in Uncategorized by letsgetitdone

Among the many posts on the Trillion Dollar Coin (TDC) and Platinum Coin Seigniorage (PCS) we’re seeing this week, is a category of posts favoring using PCS in a limited way to avoid the debt ceiling crisis, rather than using it in a much more robust way, that would change the procedures underlying Federal spending, so that fiscal policies advocating austerity no longer have a political foundation in a visible and rising national debt that austerity advocates can constantly talk about fixing through “shared sacrifice.”

The Trillion Dollar Coin, as in #TDC and #mintthecoin is a meme representing more than a Trillion Dollar Coin. It represents, instead, the general capability of the Treasury Department under 31USC5112(k) to mint platinum coins of whatever face value the Secretary cares to specify.

The coins involved could have $1,000, or $1 million, or $1 Billion, or $1 Trillion, or $60 Trillion, or $100 Trillion, or even $1 Quadrillion face values. So, an issue immediately raised is what platinum coin denomination(s) should be minted by the Treasury Department if it decides it wants to use PCS to help fill the Treasury General Account (TGA) with enough electronic credits to fulfill its objectives?

Of course, the answer to this question is inherent in the way I posed it. It depends on the objectives involved, and these objectives will not and should not be merely narrowly financial or technical. They will and should be political.

And the two main political objectives associated with PCS and the TDC up to this time have been a) remove the risk of a politically induced default on the debts of the US Government caused by a refusal of the Radical Republicans to raise the debt ceiling to accommodate deficit spending appropriations Congress has already made; and b) to end the political context of austerity which has constrained and limited government activity in the service of public purpose, since the “fiscally responsible” (really stupidly fiscally irresponsible) Democrats gained control of the Executive Branch of government in 2009.

In the latest outburst of posts, tweets, articles, and videos about the TDC, we’re beginning to see, a feeding frenzy in which the participants self-organize around the TDC meme AND the objective of avoiding the debt ceiling, but without providing any consideration at all to higher value PCS options that could both make the debt ceiling a dead letter and also remove the driving force for austerity politics. This focus on the bare TDC and its application to the debt ceiling is “small ball” policy analysis that ignores larger issues related to PCS. It needs to stop before it totally drives PCS into a defend the status quo solution, that may defuse the debt ceiling, but still leave us in the sorry state of austerity-driven politics

The focus on “small ball” policy analysis of PCS is emblematic of the superficiality of media outlets and what passes for “journalism” in the early 21st century. Too many content professionals are no more than marketers and propagandists, and don’t make even minimal attempts to get at the heart of the larger PCS news story.

If the small ballers get to control the PCS debate it will result in the waste of a remarkable opportunity to change the whole direction of American politics. Progressives need to wake up and try to grasp this opportunity, before the fiscal conservatives save their version of the financial system with its increasing tendency to impose austerity on the rest of us while the 1% get more and more wealthy.

Let’s review the pattern of those recent “small ball” PCS posts (each one summarized in the Appendix), and the significance of the position they take on PCS, then in my next post, I’ll deal with an exception to the “small-ball” pattern. And in the Post after that I’ll compare the small ball position with the one taken in the relatively few PCS “game-changer” posts.

The “Small Ball” Pattern

The primary characteristics of the small ball posting pattern are:

– They generally don’t consider any other options but the “TDC” option. They take the TDC meme literally and address their description, analysis, and advocacy to the TDC option, and its ability to end the debt ceiling crisis, and not to any of the other Platinum Coin Seigniorage variations, and what they may be able to do.

– They view the TDC option as somehow screwy, outrageous, ridiculous, looney, bizarre, or highly inappropriate, even though they acknowledge that it is legal, and probably would not be inflationary.

– They also believe that debt issuance prior to deficit spending, the way things are now done, is preferable to issuing platinum coins and then spending without debt issuance. So, some are concerned about the impact the TDC will have on the Federal Reserve’s control of monetary policy and its independence and most are advocating Josh Barro’s idea of swapping PCS capability for repeal of the debt ceiling legislation.

– They favor the TDC, however, despite its negative characteristics, for one very good reason: using it is preferable to defaulting, in violation of the Constitution, when the debt ceiling is reached, and, again, according to Josh Barro’s proposal, the capability to make TDCs can be traded for debt ceiling repeal, once it’s shown that it can be used to avoid the debt ceiling and prevent default.

Let’s evaluate this pattern. First, the idea that we have only one problem to deal with and that’s the debt ceiling problem is short-sighted and narrow, and reflects the bias of small-ball writers towards the economic and political status quo. What they all want is for the debt ceiling crises to be over, for it to go away, and for the political system to return to normal.

Well, that may be what these writers want; but “normal” in the current political system is austerity politics, a politics in which “the fiscally responsible” people in both parties are about to agree on severe cuts to discretionary spending and the social safety net, and also, perhaps to increasing tax revenue, which will extract further money from the economy. The cuts in deficit spending being planned, with or without any debt ceiling crisis, will severely reduce aggregate demand, and will do that for years to come; condemning American to a depressed and stagnant economy for several more years and perhaps beyond. That situation’s not much good for most of us, but it would be the result of the failure to end austerity resulting from viewing PCS as just an expedient for solving the debt ceiling crisis.

Second, I know it’s fashionable for the Very Serious People (VSP) who comprise the New York/Washington policy/financial axis to view PCS as silly, ludicrous, and all the other various epithets they’ve seen fit to bestow on it. But. In doing so, they reveal their ignorance of the history of fiat money issuance and coin seigiorage unaccompanied by debt issuance in the United States and elsewhere.

Lincoln’s Greenbacks funded the Civil War without ruinous inflation, and many nations funded their spending in World War I without debt issuance, and Nazi Germany, even if we hate the example, used it without issuing debt and without inflation in the pre-World War II period. Platinum Coin Seigniorage is not a priori silly. It is just not the way things have been done before, and if used in high denominations, it would require adjustments by the Federal Reserve. That does not make it silly, or looney, or ludicrous, or any such thing. It just makes it new and untried. That may be a problem for conservatives, and members of the MSM village, who, above all, want to be viewed as among the VSP; but it should not be one for progressives.

Third, the belief that deficit spending preceded by debt issuance is preferable to using PCS to close the gap between tax revenues and government spending is a belief I don’t share. The basis of it, apart from some of its advocates benefiting from current arrangements in some way, is the belief, that Treasury issued reserves in the process of spending without debt issuance are more inflationary; than reserves added only after debt issuance. This, in turn, requires assuming that debt instruments added to the economy as net financial assets are less inflationary than reserves added when unaccompanied by debt instrument sales. This assumption is false.

Debt financing is accompanied by interest payments into the economy of some $245 Billion at present. In addition, debt instruments can be sold anytime reserves are needed, and also, debt instruments can be leveraged multiple times when used as collateral in credit transactions. Reserves do receive Interest-On-Reserves (IOR) from the Fed these days. But the rate paid is lower than on Treasuries and also the payments are made by the Fed and are not a cost to the Treasury. Finally, since reserves injected into the economy through deficit spending cannot be leveraged as effectively as debt instruments, they are not as potentially inflationary in a financial system where private banks and the Fed, based on credit, routinely create money out of thin air, whether the Treasury deficit spends or not.

Believing that it’s preferable to have debt issuance precede deficit spending, rather than to use PCS prior to it, also is accompanied by concern about the impact of use of massive PCS would have on Federal Reserve control of monetary policy. PCS, in fact, is likely to result in the Federal Reserve’s having to adjust whatever it wants to do in response to deficit spending. Is this a problem, or a bad thing? Does that compromise the Fed’s independence? Doesn’t the Fed now formulate its monetary policy based on the assumption that the Treasury will issue debt?

Of course, it does. So, what the Fed does now is already impacted by what the Treasury does. It is already reacting to what the Treasury and Congress do, and we also know very well that it reacts to what Wall Street does. And the change that would be introduced by using PCS as the basis of all deficit spending would do no more than cause the Federal Reserve to make some different assumptions before it reacted to these various forces.

The idea that this is destroying the Fed’s vaunted independence, and that this makes it impossible to consider very high value PCS, is no more than a bias that prefers the status quo, and the way things are done now, where the predominant influence at the Fed is from the big banks and Wall Street. It is just conservatism talking again. Just a willingness to avoid changing how we do things to take austerity off the table, and make a better life for everyone out of fear of the new, the strange, and the unknown.

Fourth, even though the “small ball” writers are for using the TDC as a last resort, most of them endorsed Josh Barro’s idea of making a deal to swap the PCS capability in return for repeal of the debt ceiling law. This idea is a terrible one, and if progressives support it or even accept such a trade, then that would a perfect example of “loser liberalism.”

It’s essential to understand that if the Treasury uses PCS and continues to have the PCS capability, then the debt ceiling legislation is already a dead letter. It doesn’t matter if it exists, since the outstanding debt can be paid using PCS, and all future deficit spending can be covered by credits generated by the Fed in the course of using PCS.

Since that’s the case, a trade of the PCS capability for repeal of the debt ceiling legislation is a trade of something potentially very, very valuable as an enabler of progressive politics in return for nothing at all. It would be a bizarre trade. A silly trade. It would be a moronic trade. A trade made for no purpose at all.

Conclusion

Only a person who wants to keep the system of government deficit spending exactly as it is today can possibly advocate such a trade. But why would people want to keep it the same as it is now, since the political impact of such a system is so disastrous for progressive politics and for government efforts to achieve the public purpose? Why would people want to preserve a system that constantly sets the political table for austerity by constantly increasing something called “the national debt?”

What do austerity advocates now use to justify the policies they prefer? The answer is that they use the existence of the debt. And then they talk about fiscal responsibility, and the grandchildren, and the markets driving interest rates up, and the possibility of running out of money, and about cutting Social Security, Medicare, Medicaid, discretionary programs that people need, and then they go on to talk about this thing we need that we can’t pay for, and that thing we need that we can’t pay for, and all the financial limitations we have in doing things that we desperately need to do to make our country viable again.

We need to put an end to all that. And we can do that if the PCS capability is maintained; and if we can find a President who will use its power to its full extent. That’s why progressives need to wake up, and not only defend PCS against a Republican attack that has already begun; but also come forward with their own PCS proposals that will go beyond the TDC and offer PCS options that will put an end to the political basis of austerity!

Appendix: ”Small Ball” Views on the Trillion Dollar Coin

This survey summarizes what each of the pieces on the Trillion Dollar Coin appearing in the last few days I had the opportunity to review had to say. They served as the foundation for the above analysis. The dominant pattern is established by the Wiesenthal and Barro posts, and then is replicated by pretty much what looks like an MSM-based echo chamber. Not every post appearing in this time frame is replicated here. And some posts on the TDC were opposed to the idea and so, are not part of the ‘small-ball” category. Nevertheless, I think the posts and the video segment reviewed here are representative and that they served as a good basis for the pattern I identify in the Post.

Joe Wiesenthal: Minting the Trillion Dollar Coin won’t cause massive hyperinflation because: the money from a TDC wouldn’t go into the economy since it wouldn’t be used to pay back the debt; and even if some of it did go into the economy, the Fed could “sterilize” that by selling enough of the Treasuries it’s holding to get money out of the system.

The TDC won’t destroy the dollar because: the money won’t be just poured into the economy like “a helicopter drop” of money to people would be. It’s just a stop-gap to get by the debt ceiling and keep services going.

People who say we should mint a $16 Trillion coin or a $100 Trillion coin are missing the point. The point isn’t to pay off our debt. It’s to get by the debt ceiling. If we did try to pay off the debt with a minted coin we’d get inflation or hyperinflation because of the massive expansion of money.

Joe Wiesenthal2: Wiesenthal points out that Paul Krugman, Jerry Nadler (D-NY), and Josh Barro of Bloomberg News have endorsed it. Barro proposes an agreement in which the Republicans give up the debt ceiling and Obama gives up the PCS capability. Wiesenthal then says that it’s silly to think of funding the Treasury with a coin, but even sillier to think that defaulting is a good idea. So, let’s do the lesser silly (my paraphrase).

He also thinks that minting a TDC would not result in massive inflation because that results only from a massive injection of new money into the system, and a TDC could result only in spending conforming to Congressional appropriations. Also, we should not mint a $100 Trillion coin because: the current economic constraint is not about money, it’s about law and getting around the debt ceiling, and a $1 T coin gets around that just as well as a $100 T coin.

Josh Barro: The Treasury has the authority to mint large denomination platinum coins and deposit them at the Fed to finance payments of the Government’s bills in lieu of issuing debt. If the Republicans offer a list of demands to be met before they vote to increase the debt ceiling then the President should should simply say that he will mint platinum coins to pay the Government’s bills until the debt ceiling is raised. And he should also promise that as soon as the debt ceiling is raised he will have Treasury issue bonds to drain the economy of currency equal to the value of the platinum coins in order to dampen down inflationary expectations. Josh Barro then says:

And then he should offer to sign a bill revoking his authority to issue platinum coins — so long as that bill also abolishes the debt ceiling. The executive branch will give up its unwarranted power to print if the legislative branch will give up its unwarranted restriction on borrowing to cover already appropriated obligations.

He goes on to say that debt ceiling coercion is no way to run a country and neither is “. . . . monetizing deficits through direct presidential of the currency, in lieu of borrowing.” So, the ideal “concession” for Obama to offer is to trade this power for repeal of the debt ceiling legislation.

Matthew Yglesias: Platinum Coin finance would create new spending capacity, but no new spending authority. But because “it’s mighty silly” he supports Josh Barro’s call for legislation that would trade platinum coin financing authority for repealing the debt ceiling.

Joshua Holland, a progressive writer, likes the idea of using the TDC. He cites Josh Barro’s post and also Jerry Nadler’s support of the TDC idea, and then brings in Kevin Drum’s legal qualms about the platinum coin legislation which I’ve reviewed earlier. But then he concludes that he’d just use the coin and let the chips fall where they may. He grants that there may be law suits, but says he still thinks it’s a good idea because there’s “. . . nothing more ridiculous than a Congressional minority threatening the economy by trying to extract unpopular concessions in exchange for paying the bills that Congress itself already ran up. Let’s not pretend this is normal behavior we’re dealing with.”

And then he points out we should not pretend that the behavior of hostage taking using the debt ceiling is constitutional behavior and then cites the 14th Amendment Section 4, and the oath of office to strengthen his case.

William Wei at Business Insider produced a youtube explaining the mechanics of the TDC, inaccurately, in the interests of brevity I suppose, lets people know about the #mintthecoin movement, and then asks people to choose which is more silly, minting the TDC and paying your bills; or not minting it and going to default.

The #mintthecoinpetition asks the White House to direct the Mint to make a single platinum trillion dollar coin! It asks for this simple solution to avoid playing political football with the US and global economies.

Charles Riley of CNN also writes about the TDC. He says it’s not going to happen because it could lead to even people worrying about inflation and to critics of Federal reserve QE being apoplectic if the Treasury Department did a further “helicopter drop” of $1 Trillion. But later after outlining the solution, he refers to it as “elegant,” and points out that Jerry Nadler supports it as do many on twitter.

Alex Hern put together piece which combines the Wiesenthal and Barro posts and follows Barro down the road of advocating the swap I outlined earlier. He also repeats Wiesenthal’s statement that the TDC idea was first suggested by Cullen Roche on July 7, 2011. So clearly Hern did no research of his own on the coin and its origin.

Connor Simpson at the Atlantic Wire is another participant in the echo chamber generated by Joe Wiesenthal. Connor mentions the platinum coin, links to all the names I’ve mentioned above, repeats Wiesenthal’s viral error about the origins of the TDC movement, mentions the #mintthecoin petition, and then follows Barro down the line about what ought to be done, but also emphasizes using the coin as a negotiating tool to get the debt ceiling leverage off the back of the President in the negotiations over the budget. Then he asks why Obama didn’t think of this before? And answers: “Because no one’s first resort to a debt ceiling fight is to create what is essentially a loonie on horse steroids, duh.” He then concludes by presenting various humorous tweets on the subject by way of agreeing with the position that the move would not damage the economy much.

Bonnie Kavoussi of The Huffington Post provides a piece on the #mintthecoin petition. She calls attention to the debt ceiling and the possible dangerous consequences of default and then refers to the concerns of some that using the TDC may “could be a slippery slope to hyperinflation.” The piece also contains a video explaining the TDC, and reproduces a number tweets about the #mintthecoin petition drive. Everything is focused around the TDC and the debt ceiling problem.

Rachelle Younglai of Reuters This article just reports on the coin proposal, the #mintthecoin petition drive, and the context in the debt ceiling crisis. It doesn’t question the legality of platinum coin seigniorage, and doesn’t suggest that the proposal is “wacky” or “silly” or “ludicrous.” It mentions the likelihood of Congressional opposition from members trying to reduce deficits, and also mentions that using the coin would compromise the independence of the Fed.

Cullen Roche joined the small-ball party with a brief post at Pragmatic Capitalism. The debt ceiling is silly. The platinum coin solution is silly. The US government has no solvency constraint, and “Willingly defaulting on US debt by using the debt ceiling as a threat is pure madness. I can’t think of many things that would be more reckless than this.” The platinum coin is a legal workaround for the debt ceiling problem first discussed in a web comment by Carlos Mucha (beowulf). Mint the TDC. Deposit it at the Fed. Use the proceeds to pay down debt and it functions like raising the debt ceiling by $1T. It’s not inflationary because it’s not new spending. It’s an accounting gimmick and shouldn’t be used. But if the choice is between the coin and default, then “. . . then the decision is a no-brainer. It would be unpatriotic to default. Even more unpatriotic for leaders to allow default when they could mint the coin.” And then he endorses the Josh Barro solution of swapping the PCS capability for repeal of the debt ceiling.

Steve Randy Waldman also weighs in on the controversy. SRW thinks “The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling. The cost of the plan is that it would inflame US politics, and there is a slim chance that it would make Paul Krugman’s “confidence fairies” suddenly become real. But note that both of these costs are matters of perception.” He thinks Treasury will reluctantly issue coins in the Million Dollar, rather than the Trillion Dollar range, to continue spending, and that the Fed will “sterilize” this spending selling assets to absorb an equal amount of money in the private sector. He thinks that’s all that would happen and that it would be a “big nothingburger.”

Chris Hayes segment with Jerrold Nadler (D-NY) and others on video.

http://www.msnbc.msn.com/id/3032507

Visit NBCNews.com for breaking news, world news, and news about the economy

This segment reflects the dominant pattern discussed in the text perfectly. The segment poses the issue as a trade-off between using the TDC and default due to the debt ceiling. Notice how Veronique De Rugy defends Republican debt ceiling tactics. Notice, also, that Chris Hayes appears not to have thought beyond the TDC idea as a solution to the debt ceiling.

Today, Paul Krugman weighed in with a very specific statement advising the Administration to be ready to mint the TDC immediately to take the debt ceiling issue off the table. He says: “Given the realities of our political situation, and in particular the mixture of ruthlessness and craziness that now characterizes House Republicans, it’s just ridiculous — far more ridiculous than the notion of the coin.”

(Cross-posted from New Economic Perspectives.)

Trouble Is When We Take the Truth Off the Table

9:53 pm in Uncategorized by letsgetitdone

Arianna Huffington is calling attention to “the great budget battle of 2011,” between the President and the Republicans. She correctly points out that whichever of the two sides win, we, the people, lose. She’s right, of course, and says further:

Just look at this so-called “debate” we’re having. The problem ostensibly on the table is the deficit. But, without any context, the raw deficit number is meaningless. If the country’s debt were, say, $50 million, that wouldn’t be a big deal. If some average American suddenly found himself $50 million in debt, well, that would be a big deal. And that’s because the country’s GDP is a lot bigger than the average person’s income. So what we’re talking about is really the debt-to-GDP ratio.

Yet the debate is concentrated almost entirely on the debt side of the equation and barely at all on ways to increase the GDP side. . . .

Arianna’s right about the pure deficit number being meaningless and needing context. But it’s also true that it needs the right context. The right context for deficits isn’t simply GDP or comparing the size of a deficit to the annual volume of economic activity, and the right measure of whether we have a deficit problem or not, or how serious it is, is not the debt-to-GDP ratio. Implicitly here, Arianna is accepting the view that the debt-to-GDP ratio is an indicator of something that causes grave economic problems. But there is no empirical evidence that there is any relationship between that measure and negative economic effects when a nation has a fiat, non-convertible currency, a floating exchange rate, and no external debt in a currency not its own.

So, she’s claiming that the current debate is constrained because only the debt side and not the GDP side of the deficit/debt issue is being debated, but I think it’s constrained because nearly everyone in the mainstream, including Arianna, refuses to debate whether there are any deficits, debts, or debt-to-GDP ratio levels that make it necessary to either increase taxes or cut spending, or, alternatively to avoid further tax cuts or spending increases. Please don’t misunderstand. I’m not suggesting that we shouldn’t cut spending and/or taxes in certain areas, or increase spending and taxes in others. What I’m saying, instead, is that any fiscal proposals at all need to be evaluated according to whether their consequences are likely to be in accord with public purposes, and not according to whether they either raise or lower deficits, the national debt, or the debt-to-GDP ratio.

In short, I’m suggesting that there is no deficit/debt problem for the United States at all. And I’m asking why the debate that Arianna refers to doesn’t start with the bedrock question of whether there is a deficit/debt problem, and only when that question is settled, and only if necessary, move to the subsidiary question of whether the present focus on spending cuts ought to be broadened to the GDP context, or for that matter to the question of tax increases on the wealthy?

Arianna continues:

. . . How has the playing field of what is acceptable in this debate been so shrunken that the only two competing proposals still allowed on the field are the president’s cuts and the House GOP’s draconian cuts?

Well, it was no accident. And, as it turns out, there’s an entire field of study based on the dynamic being played out: Agnotology. Coined by Robert Proctor, a historian of science at Stanford University, the word means the study of ignorance that is deliberately manufactured or politically or culturally generated. “People always assume that if someone doesn’t know something, it’s because they haven’t paid attention or haven’t yet figured it out,” Proctor says. “But ignorance also comes from people literally suppressing truth — or drowning it out — or trying to make it so confusing that people stop caring about what’s true and what’s not.”

Sadly, this is quite to the point. But it doesn’t apply only to the present debate in the sense that the wider context of how the debt-to-GDP ratio might be reduced through alternative tax and spending policies designed to increase GDP is being “drowned out” or suppressed. It also applies to it in the sense that most media outlets including blogs with wide audiences are “drowning out” or suppressing post-keynesian and other heterodox economic viewpoints on the deficit/debt debate.

Ignorance of these positions is being manufactured and maintained by all of the mainstream media and by much of the alternative media, too. The way it is maintained is partly by ignoring the existence of alternative views about whether there is a deficit problem; partly by distorting and misrepresenting these views when they are, infrequently, able to find expression in popular outlets, and finally, by not supporting and fostering open debates between different fiscal sustainability/responsibility approaches. Using these methods, the media have made it difficult for any views to gain currency except deficit hawk and deficit dove views on the deficit. It’s as if the media, including much of the blogosphere is frozen in the deficit hawk/dove neo-liberal polarization, just as politics in Washington is frozen into its narrow left-right polarization. However, there is a deficit owl position in the fiscal sustainability/responsibility debate, and it needs to be considered seriously by everyone debating these issues because 1) it may be right; and 2) the deficit hawk/dove polarization has worked out very poorly for the doves.

Why? Because the deficit dove position, in its most enlightened form represented by Paul Krugman, Joe Stieglitz, Robert Kuttner, Simon Johnson, and much of the Washington, DC progressive establishment starts by granting the premise of the deficit hawk position, namely that the debt-to-GDP ratio is important, and that we must monitor Government spending with reference to its impact on this ratio. Now, these folks, as the old saying goes, “haggle over price.” The hawks think that the ratio has to go down now and that we can’t expect the increase in the GDP half of the ratio to outpace the increase in the debt half. The doves believe that we have time to bring the ratio down and that if we do things right, then we can lower it by growing faster than we borrow, raising taxes on the wealthy, and by cutting things like Defense spending, and the rate of growth of health care costs.

But when the two sides debate, the compromise that comes out of that debate always means agreement on the need to manage fiscal policy with the goal of decreasing the debt-to-GDP ratio, and on some plan to reduce that ratio by spending less, taxing more, and just accepting CBO’s future GDP growth projections, which are both very conservative and extremely unreliable, as all long-term projections have always been. This leads inevitably to a shared pain and sacrifice scenario for various plans for decreasing the debt-to-GDP ratio over the long term. And this mantra of shared pain and sacrifice then inevitably devolves into a debate about how that sacrifice should be shared. In today’s political system, the wealthy and powerful, in the end make no sacrifices, and in fact gain new advantages after these debates. But working people somehow always get called on to make any financial sacrifices that are implicit in the deficit hawk/dove position. Hence the 99ers, the long-term unemployed, Medicare recipients, public employees in Wisconsin, Ohio, New Jersey, Indiana, and the like.

The deficit doves fight back when spending cut proposals threaten programs like Social Security, Medicare, and various “discretionary” programs that are very important to many people. But the pushback from the doves while fact-based and logical, is designed to avoid specific cuts, like preventing Social Security cuts. It is not pushback against the very idea of deficit cuts and managing Federal fiscal policy with reference to the deficit/debt “problem.” So, for example, a year after the President appointed his Catfood Commission, and a large coalition of progressive organizations picked apart the logic and facts supporting the Commission’s leaked views on Social Security, it appears that a lot of the momentum in back of Social Security cuts has been blunted, but, as Arianna says, the debate is now down to a choice between the President’s proposed, and very damaging to the economy, cuts and the GOPs “draconian” ones. But what can one expect from a debate that concedes the major premise of the deficit hawks in the first place?

If we had been fighting over the past two years about whether there really was a deficit problem, and whether it was ever proper to manage fiscal policy with an eye toward deficit and debt indicators, we would be looking at different debates today. We would not be down to damaging cuts vs. draconian ones, but to whether we should have any spending cuts at all, or instead should be spending whatever it takes to reach full employment and solve our other national problems. In other words, we’d be having the Hoover/Roosevelt debate right now, not the Obama/Tea Party one.

So this is my advice to Arianna. If you want a broader debate, then structure some between deficit doves and deficit owls. That is, get the Keynesians like Krugman, Johnson, and Stieglitz arguing with people who follow the Modern Monetary Theory (MMT) approach like Randy Wray, Warren Mosler, Stephanie Kelton, Scott Fullwiler, Marshall Auerback, Mike Norman and Jamie Galbraith. And get Bill Mitchell participating from Australia. And get some Congresspeople exposed to these perspectives. Then you’ll see some fireworks, and you’ll also begin to structure a debate that won’t be about cuts, but about what we can do to get the economy growing rapidly and building the foundation our grandchildren will need to keep the dream alive.

Often when we’re debating issues, it’s not about “drowning out” or suppressing the truth from our point of view. What it’s about, instead, is suppressing alternative points of view that we don’t think can possibly be the truth, because their implications conflict with our preconceptions, and so are not worth taking our time to learn. The problem with this is that we’re too often wrong about what can’t possibly be the truth, and as a result we take the truth out of the debate before it has been tested against competing points of view. We can’t continue to let that happen in the debate over fiscal policy. If we do, we may well be dooming working Americans to a future of needless continuing privation that will threaten the economic basis of American Democracy.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Federal Spending Doesn’t Cost Anything!

12:40 pm in Uncategorized by letsgetitdone

Over the past year, I’ve written numerous posts about fiscal sustainability, fiscal responsibility, and the various fairy tales and myths underlying what almost all of our policy makers have to say Government finance. I continue to search for a meme that will catch fire and lead people to seriously question the false idea that the US can’t: afford to put everybody back to work, see to it that all Americans have good health care; provide an excellent education for our children, reconstruct the energy foundations of our economy, re-invent our infrastructure, and take the measures necessary to solve our other major problems before they get any worse.

It’s the idea that we can’t afford to pay for many things that we would like to do, that makes it so hard to legislate solutions. With “the national debt” at the level that it is, many legislators who might normally do whatever they could to address our various problems just throw up their hands. The rhetoric of fiscal sustainability and fiscal responsibility is too powerful for them to oppose. They want to be “responsible.” They want to be “grown-up.” They want to be known as people who can make “tough decisions.” So, as long as they believe that Government spending costs something, and adds to a crushing debt burden that we have to do something about, they will not vote for effective measures that will solve our national problems because either the cost/debt implications of solutions involving additional deficits are too great, or the tax implications of matching the costs with additional revenue are a burden they are unwilling to face.

So, here I go again with another meme, namely:

Federal deficit spending costs the US Government no net financial assets

And by the way,

Tax cuts that increase deficits also cost the US Government no net financial assets

How can that be? Well the short answer is that the US Government, viewed from a holistic perspective (Congress, Treasury, the Fed, and their interactions with one another) has no limits in its ability to create financial resources. My friend Warren Mosler, who last week reminded me that payroll tax cuts really cost the Government nothing, a reminder that led to my writing this post, likes to say that the Government is like the scorekeeper in a game. Like the scorekeeper, it never runs out of points to give to the players in the economic game, if the rules of the game make it necessary to hand out points.

As it is with the scorekeeper, the Federal Government neither has nor doesn’t have any points (or USD). What it has instead is the authority to create points (dollars) in the non-Government sector through spending, and also, in the Government’s case, to destroy them (through taxing or selling debt instruments). These days when the Government creates dollars, it typically costs it virtually nothing, because it’s done electronically; and that also holds true when it destroys dollars. Let’s look at the process of how the Government deficit spends in a little more detail to see how this works out.

First, when the Government decides to deficit spend, the Treasury typically does that by instructing the Federal Reserve Bank (FRB, or the Fed) to markup the reserve account of the bank of the recipient of the spending, and to instruct the bank to credit the recipient’s account. Since by law the Fed can’t allow the Treasury to run an overdraft in the Treasury General Account (TGA), Treasury must anticipate such an overdraft, and, following Congressionally imposed constraints, must sell debt instruments (e.g. Treasury Bills) in an amount necessary to ensure that there is no overdraft. So, step one places a debt instrument in the non-Government sector, and removes USD from that sector by debiting the purchaser’s account, and the reserve account of the purchaser’s bank, crediting Treasury Tax & Loan Accounts (TT&L), and ultimately the TGA.

Second, in step 2, the Government spends and marks up the non-Government sector reserve accounts, causing the spending recipient’s account to be credited. At this point, the Government has withdrawn dollars from the non-Government sector, while adding the same amount of dollars through its spending, along with its debt instrument. It therefore has added a net financial asset to the non-Government sector, namely its debt instrument, having a specific principal value. What cost has it incurred in order to do that and perform its deficit spending? The answer is, virtually nothing.

Third, when the debt instrument sold by Treasury matures, Treasury will have to pay the principal and interest to the holder of the instrument. This repayment will then involve an exchange of money in return for the debt instrument, that is, an exchange of one type of financial asset for another. This is very likely to involve deficit spending again, but the financial asset remaining after the next cycle of spending and debt issuance will be larger.

Fourth, however, there is another scenario involving debt instrument redemption, as well. In that one, the Federal Reserve decides to buy debt instruments from the public. Unlike the Treasury, however, the Fed can simply markup accounts within the banking system without itself issuing debt. It creates money “out of thin air” and increases the money supply. When this happens we can see the full pattern. The Government has deficit spent, added a financial asset to the non-Government sector, and eventually converted that financial asset back to money, leaving an increased money supply in the non-Government sector, absent off-setting taxes or additional debt issuance.

Again, what does it “cost” the Government to deficit spend in this way? Virtually nothing. Also, note that the “cost” involved in deficit spending is the same whether or not the deficit involved is caused by new tax cuts or by new spending. So, again, Federal deficit spending costs the US Government no net financial assets; and tax cuts that increase deficits also cost the US Government no net financial assets.

Reading this, some of you may react by saying that the pattern I’ve sketched out is dependent on the ability of the Treasury to sell its debt instruments, and may ask: what happens if prospective buyers, especially foreign nations won’t buy our debt anymore? Well, that is extremely unlikely to happen, for reasons I’ve outlined here.

But if it does, then the Government has other ways of deficit spending at no cost to itself. Specifically, Congress can stop requiring Treasury to issue debt when it deficit spends, and just let Treasury spend by marking up accounts. I’ve discussed that alternative here. Also, Treasury can use coin seigniorage to ensure that the TGA never runs an overdraft. I’ve discussed that here. Finally, Congress can place the Fed under the Treasury where it belongs, and the Treasury would regain full authority to create the currency needed for deficit spending.

In short, the Government can always deficit spend at no cost to itself. So, the idea that it can’t afford to spend what’s necessary to solve our various problems is just false. It’s a bad joke, a fairy tale, or a lie, depending on who’s telling it. Government spending certainly has real costs in resources and human effort that need to be arrayed against the real benefits of Government spending. Also, if the Government spends money beyond the capacity of the economy to produce goods and services, its money can be used to buy, then too much spending can cause demand-pull inflation. But the US Government, unlike the rest of us, has no financial limitations, only real ones of the sort I’ve just listed. So, since Federal spending doesn’t cost anything, let’s start doing it to provide everyone who wants to work a job, and while we’re at it, let’s save those state jobs in Wisconsin and every other state, and put our ridiculously bloated, ineffective, murderous, and corrupt health insurance industry out of business by passing HR 676, Medicare for All.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Ezra Looks Over There At the Debt-to-GDP Ratio

9:41 pm in Uncategorized by letsgetitdone

Ezra Klein did a piece yesterday offering the conventional deficit dove position on deficits and debt. Here’s a commentary on it.

Gallup’s survey of voter preferences for closing the entitlement gap is incomplete It suggests the options on entitlements are like a second-grade arithmetic problem: You can either add stuff (tax increases) or subtract stuff (benefit cuts). What’s missing is the option you learn about in high school: growth.

Well, actually, both Gallup and Ezra assume that “the entitlement gap” is a problem. Gallup tells the people they can solve it, by cutting or taxing further to pay for entitlements. Ezra tells people that we can also grow the economy, and that doing so is the better choice. But neither considers the possibility that “the entitlement gap” isn’t of any importance because 1) Government spending on entitlements is a political choice we make in order to provide financial assets to certain groups, and 2) taxation is also a political choice we make for another reason, and that there is a connection between the two operations only in our mistaken and foolish belief that we must tax to pay for entitlements, when the truth is that we must tax for only two reasons. First, to make Americans need our fiat currency, and second, to prevent or contain inflation depending on circumstances. So, our choices aren’t just cut benefit benefits, or raise taxes, or grow our economy. They also include ignoring the gap between spending and tax revenues, including the entitlement gap itself, because we can afford to pay for entitlements for as long we care to without becoming insolvent, regardless of tax revenues.  . . . Read the rest of this entry →