You are browsing the archive for Federal Reserve.

Can the Federal Reserve Really Refuse To Accept and To Credit A Platinum Coin Deposited By the US Mint?

10:42 am in Uncategorized by letsgetitdone

The issue of whether the Fed can really refuse to accept and credit a deposit of a platinum coin with its face value, is being raised frequently on blog posts about Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin (TDC). In the past, I’ve argued that the Fed cannot; and the final decision on taking the TDC off the table was actually made by the President, and not by Chairman Bernanke.

Ellen Brown, the well-known author of The Web of Debt, and also of this recent post on fiat money, direct financing of federal spending, and using platinum coin seigniorage made this comment in a discussion thread at Monetary Realism:

Per the Fed’s website (or maybe it was the Treasury’s), a gas station can reject a $100 bill before the gas has been pumped. You only have to accept legal tender after the service has been rendered or good delivered. The Van Nuys Flyaway won’t take dollar bills. Apparently then the Fed can reject a tender before it has rendered the banking services involved. It’s a privately-owned bank, after all!

Here’s my reply to this comment.

The coin being presented to the Fed isn’t tendered as payment for services, or for a product. It’s a coin being tendered as a deposit into the Treasury General Account (TGA). Also, note these three considerations.

First, the Treasury Department is mandated to deposit its money into Fed accounts if it wants to enter the banking system. So unlike the gas station; the Treasury can’t find another bank; and it needs a bank to spend and implement Congressional appropriations. A Fed regiional bank, such as the New York Fed, in turning down a coin, would be refusing to perform a duty it contracted for to serve as the depository of the funds of the Treasury Department and the US Mint. I don’t think it can do that and remain a regional Fed bank.

Second, even though the regional Feds are privately owned banks; they cannot behave in ways that contravene the policy of the Board of Governors, a Federal Agency, and they are very tightly regulated by that Board. So, the regional NY Fed, the bank that has the Treasury General Account (TGA) will not be making any such decisions on its own authority. Additionally, in agreeing to house the TGA, the New York Fed has contracted to serve as the sole banking agent of the Treasury Department with respect to its spending account.

Somehow I don’t think the sole banking agent of the United States Treasury Department has the legal right to turn down a deposit of legal tender, and refuse to credit its face value in the Treasury’s own checking account. Imagine what the liability of that “private” bank would be to the US Government, if as a result of any such action, the US would be forced into defaulting on some of its payments and decided to sue the NY Fed for consequential damages. Not a pretty picture, and not a risk that the NY Fed would want to take w/o an explicit and specific instruction from the Board of Governors.

And third, consider the Board of Governors and the Chairperson of the Fed. What would they do? Well, they’ll tell the Secretary that they don’t want to do it. But if they say no; and the Treasury Secretary orders them to accept and credit the coin; then what? Then this:

12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”

So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve system was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242)

And as beowulf has pointed out, the Fed really doesn’t want to go to Court over this because they risk a Supreme Court finding of unconstitutionality due to the Unitary Executive theory, which, in this case, may well have the support of some of the most conservative justices. My own view here, is that the Fed would not even make it to the Court because they’d be denied standing under 12 USC 246, if the Treasury Secretary also ordered them not to contest his order legally.

If you read through the discussion thread where Ellen Brown left her comment, you’ll see that both Philip Diehl, former Director of the US Mint under President Clinton, and Carlos Mucha (beowulf, or beo), the lawyer who first proposed the use of PCS and the TDC, and the author of the blog post, believe that no Secretary would treat the Fed this way. But what if the Secretary were ordered by the President to do it? And what if the President were somebody like FDR or LBJ? Then I think it could happen; and depending on how tough things get in the next few years who knows what Obama will do?

After all he’s the guy with the drones. And the guy who throws people under the bus when he thinks he has to. So, why wouldn’t he throw Bernanke under the bus too, if he thought he needed to? Just sayin’!

(Cross-posted from New Economic Perspectives.)

Trillion Dollar Coin: Posts on Legality and Constitutionality

9:58 am in Uncategorized by letsgetitdone

Enthusiasm for using Platinum Coin Seigniorage (PCS) to produce a Trillion Dollar Coin, or coins totaling a few trillion dollars continues to increase. The twitterverse went mad two nights ago around #mintthecoin, a hashtag originated by MMT’s Stephanie Kelton, which by yesterday morning had become the 5th most highly trending topic on twitter.

Meanwhile, the blogosphere continued to produce more points of view on the Platinum Coin. The points of view divide into those that are very negative; either claiming that 1) using Platinum Coins would be illegal or unconstitutional, or 2) using them would be just ridiculous and financially irresponsible, and so should be avoided; and others that favor using PCS 3) either in a limited way to avoid the debt ceiling crisis, or 4) 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.” In this post I’ll review new posts on legality and constitutionality.

Kevin Drum on legality

Kevin Drum of Mother Jones filed his second recent post claiming that the trillion dollar coin is illegal and will be subject to challenge in Court on grounds of intent. He repeats exactly the same reasoning he used in his first post. I’ve already critiqued that reasoning saying that the Courts generally don’t try to interpret laws based on theories about Congressional intent. The Justices aren’t collective psychologists who are expert at divining the intent of the Congress. They are expert, however, at interpreting what the text of a law says, and so that is what they stick to almost all the time. A challenge to PCS based on intent isn’t something any Court is likely to take up. Drum then adds:

There is, apparently, a widespread belief that courts will uphold a literal, hypertechnical reading of legislative language regardless of its obvious intent, but I’m quite certain this isn’t true. Courts are expected to rule based on the most sensible interpretation of a law, not its most tortured possible construction. I don’t think there’s even a remote chance that any court in the country would uphold a Treasury reading of this law that used it as a pretense for minting a $1 trillion coin.

I am, obviously, not a lawyer. So if someone with actual legal training in the appropriate area of the law says I’m wrong, then I guess I’m wrong.

Well,, the language of 31USC5112(k) doesn’t look very tortured or “hypertechnical” either to myself or many others who have looked at this including lawyers Jack Balkin and Carlos Mucha (beowulf); but seems very plain and unambiguous. Drum is entitled to his opinion, but as he keeps saying, he’s no lawyer, and his judgment about what the Courts will do based on the problem of intent isn’t very plausible.

What if a trillion dollar coin is used to avoid the debt ceiling, and this saves the United States from defaulting on its debts, and the world financial system from collapsing? Is it then likely that the Supreme Court will entertain any challenges to the plain language of the law based on an interpretation of intent, which would then place the Treasury in the position of having to return that trillion dollars in Fed credits, and again look default in the face? Can you see John Roberts ever voting for this? Please Kevin, give us a break!

John Carney on Unconstitutionality

John Carney believes that Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin are unconstitutional. The core of his argument is:

There are limits to how far Congress can stretch its powers under the necessary and proper clause. Of particular interest to us here is the non-delegation doctrine, which holds that the Constitution’s requirement that laws be passed by both houses of Congress and signed into law by the government constrains the ability of Congress to delegate its lawmaking authority to other bodies. . . .

The Supreme Court . . . . went out of its way to affirm the basic principle of non-delegation . . .

Article I, Section 1, of the Constitution vests “[a]ll legislative Powers herein granted… in a Congress of the United States.” This text permits no delegation of those powers, and so we repeatedly have said that when Congress confers decision making authority upon agencies Congress must “lay down by legislative act an intelligible principle to which the person or body authorized to [act] is directed to conform.”

So the question that is relevant for us here is whether or not the law that authorizes the creation of platinum coins by the U.S. Treasury lays down an “intelligible principle” to which the Treasury is directed to conform.

He then quotes the law authorizing PCS:

“The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”

You see the problem here, right? There’s no intelligible principle whatsoever. The law gives the Secretary complete discretion over everything having to do with the minting of platinum coins. This is very likely an unconstitutional delegation of the legislative power to coin money and regulate the value thereof.

Carney goes on to talk about issues of standing recognizing that standing may be very difficult to get from the Courts and that therefore it may not be possible to challenge the law. But he still thinks that the above argument is a decisive one and that the coin seigniorage law is unconstitutional. You see the problems here, right?
Read the rest of this entry →

Scott Fullwiler: QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

9:55 pm in Uncategorized by letsgetitdone

By

Scott Fullwiler

(Editor’s Note: This post is being re-published with the permission of the author, Scott Fullwiler)

Cullen Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins. Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets. As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.”

The following is a description of how the process would work and the implications for monetary operations:

1. The Treasury mints a $1 trillion coin, or whatever amount is desired.

2. The Treasury deposits the coin into the Treasury’s account at the Fed. The Fed’s assets (coin) and liabilities (Treasury’s account) increase by the same amount. As Beowulf notes later in a comment to the same post from Cullen, were the Fed to resist, the Federal Reserve Act clearly states that “wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” The Fed is legally an agency operating at the pleasure of the government, not vice versa. Regardless, the actions I describe here and below by the Treasury in no way interfere with the normal operations of monetary policy (explained in various places below).

3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin. The result is a decrease in the Treasury’s account at Fed and an increase in bank reserve balances held at the Fed.

4. Total debt service for the Treasury falls, too, as higher interest earning bonds are replaced with reserve balances earning 0.25%. Effective debt service on purchased bonds now is 0.25% since interest on reserve balances reduces the Fed’s profits that are returned to Treasury each year.

5. The retirement of bonds is an asset swap, no different from QE2, except that the Treasury has purchased the bonds instead of the Fed. But since the Treasury’s account is on the Fed’s balance sheet, there is no operational difference. That is, this is effectively “QE3, Treasury Style.” As with QE2, no net financial assets have been created for the non-government sector. The net effect, like QE2, is to reduce the term structure of US debt held by private investors, as bonds have been replaced with reserve balances.

6. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown. Banks can’t “do” anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is flawed, as I explained here over two years ago.

7. Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%. Again, this is not inflationary. There are three points to make in explaining why.

First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a treasury security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no “taking money from one person to give it to another” zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and are known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.

Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.

Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income or dissaving, as opposed to additional spending out of additional income. The commonly held view that “more money” necessarily creates spending confuses “more money” with “more income.” QE—whether “Fed style” or “Treasury style”—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, “money” doesn’t spend itself. Further, by definition, spending more out of existing income is a re-leveraging of private sector balance sheets. This is highly unlikely in the current balance-sheet recession and is aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE. The exception is that QE may reduce interest rates, particularly if the Fed or (in this case) the Treasury sets a fixed bid and offers to purchase all bonds offered for sale at that price—though this again may not lead to more credit creation in a balance-sheet recession and has the negative effect of reducing the net interest income of the private sector. (As an aside, a key difficulty neoclassical economists are having at the moment is they do not recognize the difference between a balance-sheet recession and their own flawed understanding of Keynes’s liquidity trap.)

8. The debt ceiling crisis is averted, as US debt outstanding has been reduced by the dollar value of the minted coin, and can continue to be reduced as desired. This simple asset swap demonstrates that the self-imposed constraints of the debt-ceiling, counting Treasury securities held by the Fed against the debt ceiling, and forbidding the Fed from “lending” to the Treasury directly are just that—self-imposed—and are not operational constraints at all. The only constraint is in the flawed understanding of the monetary system that is standard today among the macroeconomists writing textbooks and advising policymakers, or acting as policymakers themselves. From points 6 and 7 above, this asset swap is not inflationary—spending without issuing bonds is not any more inflationary than spending with bond sales, as I explained here and here.

9. Fed is the monopoly supplier of reserve balances, the Treasury is the monopoly supplier of coins. Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed. It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients. Deficits would increase the quantity of reserve balances circulating and currently earning 0.25%. As MMT’ers have explained for years (even decades), the operational purpose of the Treasury’s sale of a bond is merely to aid the Fed’s ability to achieve its overnight target by draining reserve balances created by a deficit. But even selling bonds isn’t operationally necessary if the Fed pays interest on reserve balances at a rate equal to its target rate. On the other hand, if the Fed set the rate on reserve balances below its target and the Treasury no issuing bonds, the Fed could issue its own time deposits (with Congress’ blessing) to drain reserve balances created by a deficit. Whether the Fed’s target rate were set above the rate paid on reserve balances or equal to it, effective interest on the national debt clearly would be a monetary policy variable (as interest paid on reserve balances or on time deposits by the Fed reduces the Fed’s profits returned to the Treasury), as it at the very worst can be even under current operating procedures (see here and here).

10. This approach to dealing with the debt ceiling is far better than the recent proposal by Ron Paul, as again it lifts the veil on current monetary operations and recognizes the currency-issuing status of the US federal government. Instead, Paul proposes that the Fed destroy its holdings of Treasury securities. What’s strange about the proposal is that it shows that Paul either doesn’t understand monetary operations or is trying to have it both ways. Destroying the securities requires reducing the Fed’s capital by the same amount. Given the Fed’s miniscule level of capital (because, again, it has virtually no retained earnings after transferring them all to the Treasury each year), its capital would be way into negative territory. This isn’t a problem operationally, given that the Fed is the monopoly supplier of reserve balances. But recall that Paul was one of those protesting Credit Easing and QE1 the loudest, claiming that these would surely destroy the Fed’s capital and leave it insolvent. (Again, this is only relevant operationally under a gold standard or similar monetary arrangement—Paul and others like him want to analyze the US national debt and the Fed as if a gold standard existed, and then claim that a going on the gold standard is the solution to all of our problems, but I digress.) So, effectively Paul’s proposal would leave the Fed in a state of (in his view) “insolvency”—perhaps he does know what he’s doing and his debt ceiling proposal is just part of his grand plan to “end the Fed.” Otherwise, it would have been simpler to simply propose exempting the Treasury securities held by the Fed from counting toward the debt ceiling.

Lastly, giving credit where it is due, I want to again recognize the efforts of both Joe Firestone and Beowulf in researching and explaining the legal basis for and operational implications of the Treasury’s Constitutional authority to mint its own coin(s). This post benefits significantly from their important, original work.

(Cross-posted from New Economic Perspectives.

The Tenth Thing to Do – Not!!!

8:02 pm in Uncategorized by letsgetitdone

[Ed. note: What do you think? Is the national debt really one of the most urgent things on the To-Do List?]

Earlier this month, Thomas Geoghegan wrote a piece for The Nation telling the Democrats the ten things they could do to really get the base excited, and at the same time do good things for the country. Here’s his list.

1. Raise Social Security to 50 percent of working income.

2. Let’s extend Medicare to people 55 to 65.

3. Make it a civil right to join, or not to join, a labor union.

4. Put in a usury cap of 16 percent.

5. Set up small government banks like the German Sparkasse.

6. Give everyone the right to six days of vacation — six consecutive paid working days.

7. Let employees sue corporate officers for breach of fiduciary duty to the corporation.

8. Pass a College Bill of Rights.

9. End the filibuster.

10. Get the country out of debt.

Well, I might disagree with one or two of the first nine items. For example, I’d go for Medicare for All, and I’d also put in a usury cap of 6 points over prime, since a cap of 16 percent would still leave the banks with enormous profits on credit costs of near zero for them right now. But where I think Geoghegan is way off base is on getting the country out of debt. I’d like to keep this post as short as possible, so I’ll focus on just a few of his views. He says::

Finally, we have to take back the GOP’s big issue, the federal debt. Indeed, for every kind of debt — government, consumer, trade — the Democrats have to be the party that gets the country out of debt. That’s the only way to bring back a fair and just economy that lifts the middle class. As debt piles up, even our base is freaking out. Deep down, people grasp that America got into this mess with too much private debt. "Hey, if we’re all trying to get our own debt down, how does it make sense for the government to run it up?"

This statement conflates a number of different problems under the same heading — “debt.” But these “debts” are very different, and Geoghegan doesn’t explain either their differences or their relationships. He only assumes that “debt” is a bad thing, and that we have to get rid of it to please the base. But what are the three kinds of “debt” and how do they differ? Well, first, Federal debt is that part of the deficit (the difference between tax and other revenues of the Government, and Federal spending) that the Federal Government has matched with the sum of its outstanding debt instruments. Second, non-Federal debt is the sum of loans outstanding incurred by other Government entities in the United States, and by private sector entities: individuals, corporations, and other organizational entities. . . .

Read the rest of this entry →

Loose Talk and Numbskull Notions At the Podesta/Holtz-Eakins Debate: Part Two

12:12 pm in Uncategorized by letsgetitdone

This is Part Two of a critical review of The National Journal’s Debate on "Our Fiscal Future" between John Podesta and Douglas Holtz-Eakin with Jim Tankersley moderating, at The George Washington University’s Jack Morton Auditorium. This part provides more observations and evaluation on some of the propositions offered by Holtz-Eakin and Podesta.

H-E: Eliminating tax cuts for the rich will cost 1.5% to 2% GDP annually.

Me: This one is really hard to believe. The tax cuts for the highest income people would average about $70 Billion per year. The multiplier associated with these cuts is only $0.29 on the dollar. So destroying these financial assets through taxation will cost the economy about $20 Billion annually. As a percent of current GDP that amounts to 0.14 percent, not 1.5 to 2 percent. So, I think we need to view this claim of Holtz-Eakin’s with a big dose of skepticism. The question is, why didn’t Podesta question it?

H-E: It’s not Obama’s money, it’s theirs! The Government is a redistributive engine!

Me: This is a conservative article of faith. But looking at it from a more objective point of view, currency creation is a monopoly of the Federal Government. All of it originates with the Federal Government. It is distributed to people, corporation, and other institutions according to a framework of laws that accords property rights to the recipients of currency.

These property rights aren’t absolute, they originate in due process of law, and they are limited by legal frameworks and processes. Without such a framework, property rights would not be operative at all, but possession of property would exist only because the holder of property had the physical power to continue to hold it. It is part of the legal framework of our society that the Federal Government has the right to tax and destroy financial assets, that is to take some financial property, in accordance with due process of law in order to fulfill public purposes. This taking of property is not arbitrary it is done according to law and in the context of a political democracy where citizens authorize the legislature to make rules that govern these "takings" by the Government.

So, no “owner” of currency or financial assets has absolute ownership. People and institutions “owning” currency have no absolute rights in that currency, and the Government can repossess currency (tax) to fulfill its legislatively approved purposes. No, the money doesn’t belong to Obama; but the idea that it may be subject to income or other kinds of taxation is firmly enshrined in law and custom. In fact, taxation is necessary to give a fiat currency its value in the first place.

As for the Government being a redistributive engine. You bet it is! But markets are redistributive engines too, and when they are non-competitive, and manipulated and governed by fraud and insider trading, they are an illegitimate, even criminal redistributive engine, as we have seen in the past few years.

Also, the legal framework we create to regulate commercial transactions to a greater or lesser degree itself results in redistribution. The framework put in place by The New Deal in the 1930s eventually produced both great prosperity, and a much greater degree of economic equality than we have today. Conversely, the legal framework that began to develop in the Carter Administration, and that was firmly set in place by Reagan/Bush41, strengthened by Clinton and Bush43, and so far maintained by Obama, has produced substantial destruction of wealth among the middle class in the past few years, and increasing inequality over the whole period of these presidencies. It has served us badly in the way it distributed wealth, and it now must change in the interests of justice.

So, yes, Government, in combination with market dynamics, is a distributive engine, and for the past 35 years it has been redistributing economic rewards in the wrong direction. It is time to right the balance. A silent “class war” has been fought for 35 years now, by the rich and the large corporations, against the poor and the middle class. It is time for the people who are victims of this one-sided war to begin fighting back; to acknowledge that "class war" is what is going on, to fight that war, to win it, and to adjust the legal framework, so that the balance is redressed toward greater equality. It is time to end the days of plutocracy and to bring back democracy to America.

H-E: Deepest unfairness is not keeping Government small!

Me: Holtz-Eakin is given to pronouncements of articles of faith from conservative ideology. The notion that Government should be kept small was outdated in Teddy Roosevelt’s time when he went to war against the giant trusts. It was outdated in FDR’s time when he tamed the interests controlling economic life in America. In these days of giant global businesses and international cartels it is absolutely ridiculous to think that small government could possibly produce fairness to individuals. Americans need big government to represent it against the great concentrations of economic and private political power we see all around us, because only big government can have the power and resources to make large corporations obey our laws, and treat individuals fairly and with respect.

It is either big government and heavy, careful regulation of the corporations, aand the markets, or breaking up the global corporations, scaling then down to a size that a small government can regulate, and making sure that they never grow beyond a certain point again. But we cannot have a small Government and huge global corporations and expect to have liberty and justice too. That is just dreamland.

Our problem is not big government. It is that the Big Government constructed by the New Deal and its successors was corrupted by neoliberal ideology, lack of enforcement of regulations, repeal of essential regulation, and control of our regulatory institutions by people who were appointed to gut them, and who refused to fulfill their legal responsibilities while in office.

Our big Government is broken. True enough. But the only reasonable way forward is to fix it; not to find refuge in small government, 19th century liberal, fairy tales. The deepest unfairness is not failing to keep government small; it is a weak and ineffectual government that doesn’t have the power or the willingness to see to it that corporations and the wealthy respect the rights of Americans and treat them fairly.

H-E: The top two tax brackets will have to go as high as marginal tax rates of 80% if we can’t borrow money as we are now!

Me: We don’t have to continue to borrow money in order to deficit spend. The Government has the constitutional authority to create all the money it needs by spending; i.e. by marking up private sector accounts. We are not running out of keystrokes to accomplish this spending. Debt issuance is a policy choice. Not a necessity. If the bond market doesn’t want to buy our securities at the price we’re offering them for, then we can have the Fed buy them at whatever interest rate we think is appropriate. The interest the Fed earns on these securities gets remitted to the Treasury minus the Fed’s cost of processing.

So, if we want to, we can issue no more debt, or alternatively only debt that will be bought by the Federal Reserve at an interest rate of our choice. There will be no high interest burden and there won’t be any debt that it is necessary to pay down or off. There will only be the permanent recycling of debt at very low or no interest. So there will be no need to raise marginal tax rates to 80% as Holtz-Eakin claims.

But even though there is no need to tax at 80% marginal tax rates to achieve fiscal responsibility or sustainability, we may still want to tax at those marginal rates, if that’s what is necessary to create a more equal society. In American history, there have been two central values: individual liberty and equality of opportunity. The loss of a measure of economic equality is now threatening both those great values. If we want to restore them we have to bring the great engine of big government under democratic control once again, and begin to level play fields, so that dangerous concentrations of bureaucratic power, either private or public, are neutralized, and every American has the opportunity to lead a fulfilling life.

P: Tax reform is very hard to do, has very low prospects!

Me: John Podesta is very much involved in practical everyday politics. He understands both Congress and the Executive branch very well, and the limitations of what those institutions could do in the last 20 years or what they can do today. But how good is he at predicting political change? For example, did he anticipate the rise of tea party candidates and their success in this primary season? Can he predict what the big political picture will look like in two or three years? I doubt it!

Clearly if the future political environment is like it is now. The prospects of tax reform will be small. But one thing we do know is that we live in a political economy that is being buffeted by the winds of change. There’s an appreciable danger of a double-dip recession, and there’s a widespread feeling in the country that the Congress, and especially the Senate, is dysfunctional, and that this institution must change. If it does change., if the filibuster goes, then the political context will change quickly, and tax reform will then be much easier.

But before, Podesta and Holtz-Eakin wish for tax reform, perhaps they ought to give a little more thought about what kind of reform it may be. Based on things said among the elites, many seem to feel that we should be adopting a Value-Added-Tax (VAT). This idea is very, very unpopular among the public, however, and if democratic control begins to come back, the reform we may see won’t be a VAT, but a much more progressive income tax system than perhaps they’d like to see.

H-E: If we go down the road we’re on, the best case is stagnation; the worst case is collapse and then stagnation!

Me: Well, the road we’re on is a bad one. But the road Holtz-Eakin favors is even worse. The austerity he recommends is the true path to collapse and then stagnation. It is the Hooverite path, and it is already bringing suffering and poor economic performance to the PIIGS in the Eurozone.

H-E Entitlements have to be on the table. It’s that vs. nothing!

Me: That assumes, of course, that we have a deficit or a debt problem. As I argued in Part One of this series and in other places. This idea is a myth, a fantasy, and it betrays ignorance of the workings of a fiat currency system. Most of what Holtz-Eakin says about the economy applies very well to economies on the gold standard, economies without control of their own currency, or economies with substantial debts owed in a foreign currency. But, very little of what he has to say applies to a Government sovereign in its own fiat currency, like the United States.

P: The new health care reform act changes the way we deliver health care.

In you dreams, John Podesta. The new health care reform is mostly about insurance coverage. It does have provisions that could lead to more effective and efficient health care delivery, if the providers cooperate and the act is well-administered, and if the claims of the Administration about how many additional people will be covered by insurance prove true.

However, the lack of insurance cost controls suggests that people will not be able to afford insurance once the program really goes into effect in 2014. Also, it’s doubtful that the vast expansion of Medicaid can be handled financially by our revenue-starved states even with Federal Aid specified in the act. In addition, CBO’s projections of money saved are unlikely to occur simply because CBO projections are unreliable more than a few years out.

All this means that we are unlikely to have much change in how we deliver health care, except, perhaps to have further deterioration in the way we deliver it across the board. The celebratory attitude of John Podesta about how the act is going to bend the cost curve looks to me like one of the many “happy dances” the current Administration and its supporters have done about its very limited, and highly compromised achievements. All of which have been carefully constructed with an eye toward compromise with every special interest that could possibly squawk about the legislation it passed.

Finally, a more general word about this whole debate on our fiscal future. In spite of their ostensible disagreement which framed the debate, both Holtz-Eakin and Podesta agreed that fiscal responsibility will, in the coming years, be viewed from the standpoint of our success in stabilizing the debt-to-GDP ratio. That is, fiscal responsibility for both is not about using the Government’s fiscal policy capabilities to create full employment, end poverty, create a first class educational system, rebuild our infrastructure, create a new energy foundation for our economy, or any of the other substantive public purposes that Government fiscal power can be used to facilitate, enable, and even achieve. No, from their point of view we will be fiscally responsible if we see to it that the debt-to-GDP ratio stabilizes at some unspecified level rather than continuing to grow.

From my point of view however, this is not fiscal responsibility or fiscal sustainability. I think, instead, that fiscal responsibility means using the Government’s fiscal power to help achieve public purposes Moreover, I don’t think the debt-to-GDP ratio level is very relevant to fiscal responsibility at all, simply because that ratio has nothing whatsoever to do with the Government’s capability or authority to spend.

A government like ours that is sovereign in its currency has no risk of solvency. It has the same power to spend at a debt-to-GDP ratio of 170% as it does at 30%. What it does risk is inflation, if its spending outruns the productive capacity of the economy in a given time period.

The US Government can spend quite a lot right now before it runs up against that limit since we are operating somewhere around 70% of our productive capacity right now. But, if we do really want to risk inflation, then all we have to do is to follow Holtz-Eakin’s advice, and drive our economy into a depression deep enough to destroy some of our productive capacity and real rather than just financial wealth. Then when our Government does finally turn around, and tries to mimic FDR rather than Hoover, it will find it much easier than it is now to outrun our diminished productive capacity with its spending, and to cause inflation.

In other words, apart from the unnecessary human suffering, there is another potential cost to listening to Holtz-Eakin’s austerity nostrums, rather than to those who want to create full employment within 6 months, and that is that an adventure in Austerianism might well leave us with much less pre-inflation room than we have now to life the economy with Government spending.

I’m not saying that we won’t be able to create full employment later on if we need to. We can always do that, but the room for injection of financial assets into the economy by the Government can be much less, so that the end result of Government spending is less savings for the private sector, and a longer recovery time than we would have had if we had acted in the right way from the beginning. In my view we have already wasted time with the Administration’s very poorly structured stimulus with its overabundance of tax cuts, and its relative avoidance of higher multiplier initiatives to create demand. At this point we ought to wholly ignore the Austerians, and go right to legislation that will create full employment in a matter of months.

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

Obama’s Choice Is Not Faith In the Market vs. Cardigans

9:32 pm in Uncategorized by letsgetitdone

WaPo op eds are getting increasingly irritating with the passage of time. Yesterday, this formerly great American newspaper in free fall ran an article by Matt Welch and Nick Gillespie called “What’s Next Mr. President – Cardigans?” Welch and Gillespie think that Obama’s less than stellar results thus far suggest that he may be reviewing the history of past Democratic administrations to find a “road map” out of his difficulties, and also that “he seems to be skipping the chapter on Bill Clinton and his generally free-market economic policies and instead flipping back to the themes and comportment of Jimmy Carter.” In this way, they begin a transparent framing exercise suggesting that Obama is at a turning point, and that he must stop “running government as a perpetual crisis machine,” and “. . . stop doing harm. Throwing money all over the economy (and especially to sectors that match up with Democratic interests) . . . “ And also that: “. . . there’s no question that Obama’s massively ambitious domestic agenda is at a fork in the road: One route leads to Plains, Ga., and early retirement, the other to Hope, Ark., a second term and the revitalization of the American economy.” And later they say: Read the rest of this entry →