On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part:

(a) In General- In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.
(b) Obligations Described- For purposes of this subsection, obligations described in this subsection are obligations which are–
(1) held by the public, or
(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

So, in brief, the Bill provides for the Treasury, even when it is about to reach the debt ceiling, to issue additional debt to pay principal and interest on debt instruments issued to the public including foreign nations, and to pay principal and interest on Social Security (SS) “trust fund bonds” in the course of paying SS recipients.

Reactions to the Act immediately fell into two categories. Some hailed it as a move toward fiscal responsibility, while others saw it as another demonstration of Republican fiscal irresponsibility paving the way for US default on some obligations not prioritized by the bill, while making sure that bond market interests and “China” would get paid what they were owed, while the American people would be stiffed, unless Democrats gave the Republicans what they wanted in the upcoming debt ceiling crisis now projected for this October. Here are some typical reactions of the two types.

From John Avlon at the Daily Beast we have:

But even Speaker John Boehner realizes that the 50 or so radicals on the far right of his own party—the Bachmann, Broun, Gohmert and King crew—are the greatest impediment to responsible self-government right now.

That’s why the new responsible Republican proposal, which passed the House Thursday by a vote of 221-207, could be the best way to defuse the debt ceiling from its most destructive impact. . . .

So the Full Faith and Credit Act should be a no-brainer. But the Obama administration is opposing the measure, releasing a Statement of Administration from the Office of Management and Budget that stated H.R. 807 would “result in Congress refusing to pay obligations it has already agreed to … this bill would threaten the full faith and credit of the United States … this legislation is unwise, unworkable, and unacceptably risky.”

And here’s one from Travis Waldron at Think Progress:

But such a plan makes it clear that the U.S. will meet only some of its obligations, leaving many Americans, including troops, veterans, and the elderly, out in the cold. . . .

Worse yet, the Republican plan doesn’t allow the nation to avoid default. If the U.S. services its debt payments but still misses others, it is still defaulting on payments it is required to make. Since the bill only allows Treasury to make payments as it receives revenues, and the bulk of its payments are made at the beginning of the month even though revenues don’t come in until later, it would almost certainly be unable to meet at least some of its obligations.

When the GOP has considered similar plans before, Treasury officials have called it “unworkable.” Bipartisan analysts said it was “essentially impossible.” Failing to fulfill spending obligations would be “the first step to becoming a banana republic,” a Bush-era Treasury official said. Instead of inspiring confidence among investors, bondholders, and the American people, the legislation would zap it.

Far from preventing default, the Full Faith and Credit Act would essentially ensure it. That wouldn’t just put paying China ahead of senior citizens and members of the military — it would also hammer economic growth both in the United States and across the world. (HTHuffington Post)

Calling this a “responsible” bill as the Daily Beast did is outrageous, and, of course, Waldron is quite right to point out that the bill is fundamentally irresponsible because if it were to pass and nothing more was done it would still not avoid a default inflicted by Republicans who refuse to raise the debt ceiling for the sake of hostage-taking. Nevertheless, even though I agree with Waldron and the President that the bill is irresponsible, I also think that the Democratic Senate should jump on the opportunity provided by the Republicans and pass it forthwith without Amendment, and that the President should sign it immediately, as part of a larger plan to take the debt ceiling off the table in all future negotiations. Here’s the plan.

Budget projections show that if the Bill is passed, then the Treasury would have the authority it needs to meet the majority of its projected deficit obligations and would lack only about $170 Billion in Fiscal 2014 to meet them all. Let’s look at CBO’s budget projection.

Total Revenues for the Treasury in 2014 are projected at $3.0 Trillion. Total Outlays are expected to be $3.6 Trillion. That’s a deficit of roughly $.6 Trillion, or $600 Billion. CBO projects net interest on debt owned by the public of $243 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $468 Billion, leaving a gap of about $130 Billion which Treasury can’t cover with debt instruments.

So, what can Treasury and the President do to meet its remaining obligations? The answer is that it can use Platinum Coin Seigniorage (PCS), an approach the Administration rejected in January of 2013 before the latest compromise with the Republicans allowing debt financing while temporarily suspending the debt ceiling. In January, the dominant proposal making the rounds in the blogosphere was that the Administration use a few Trillion Dollar Coins to defuse the crisis. I didn’t favor that, but preferred and still prefer a “shock and awe” $60 Trillion PCS strategy that would end austerity politics forever, if the President had the desire and the will to do that.

The President doesn’t have the desire and the will, or he would already have filled the public purse in this way. Assuming he still feels that he doesn’t want to end austerity politics, with its terrible effects on poor people and the middle class; but does want to avoid debt ceiling crises in the future, provided the Full Faith and Credit Act is passed without amendment, he can then:

– First, beginning at the start of fiscal 2014, mint platinum coins having face values of $20 Billion per month until the Federal Government is no longer in danger of failing to meet all its obligations. This is about twice the average amount of projected shortfall of $10.8 Billion per month corresponding to the $130 Billion annual shortfall projected. That amount should be enough to cover variations from the average, and also errors in the projection caused by possible recessionary effects due to the sequester and the FICA tax increase in January.

– Second the Government can keep doing this until Congress fully restores the capability of the Treasury to issue debt instruments alongside deficit spending Congress has appropriated. How long this will go on, depends on the Republicans, of course. But even over a year’s time, the amount minted would come nowhere near the Trillion Dollar Coin values the Administration found unpalatable a few months ago. In fact, if the debt ceiling crisis is resolved by year’s end, the amount minted wouldn’t exceed $60 Billion, hardly great enough to roil the international or bond markets, or most people, given the amount of Quantitative Easing (QE) the Fed has already done. If the debt ceiling crisis lasts any longer than that and the financial world gets roiled by the practice, then a) it will certainly prefer the minting of those coins to the alternative of default; and b) they’ll know which party to come down hard on in blaming someone for the continuing crisis.

– Third, at some point in this process, the Republicans will be willing to increase the debt ceiling, but since PCS is being used to avoid shutting down the government or defaulting, their leverage to extract concessions will make the debt ceiling negotiations much easier than they are today. I recommend that the Administration give away nothing to get the debt ceiling raised. It should simply insist on a no-strings attached permanent elimination of the ceiling; while pointing out that the Full Faith and Credit Act, coupled with PCS provides enough flexibility for the Treasury to continue spending appropriations and meet all the nation’s obligations, even if the debt ceiling is never raised.

This may seem to be a very hard line. But in passing the Full Faith and Credit Act, the House has given the Democrats the opportunity to use debt instruments to cover most of the deficit anyway. And PCS gives the Administration the power to cover the rest. So, the Republicans would have a choice of getting rid of the debt ceiling permanently, or allowing the minting of $20 Billion platinum coins at the beginning of every month. If that’s their choice, then I think they’ll get rid of the debt limit, before the President decides to mint a $60 Trillion Dollar coin, don’t you?

Update: CBO just released revisions to its projections for 2013 – 2023. Total Revenues for the Treasury in 2014 are now projected at $3.042 Trillion. Total Outlays are expected to be $3.602 Trillion. That’s a deficit of roughly $.56 Trillion, or $560 Billion. CBO projects net interest on debt owned by the public of $237 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $462 Billion, leaving a gap of about $98 Billion which Treasury can’t cover with debt instruments.

The smaller gap means that it may not be necessary to use $20 Billion platinum coins every month; but only $15 Billion coins to handle variations from the new average shortfall of about $8.2 Billion per month. Of course, if deficits accumulate faster than expected, it would be easy to simply begin minting $20 Billion coins.

(Cross-posted from New Economic Perspectives.)

OK, austerity has always been about the causality. The people who are trying their best to get us to cut more and more spending, somewhat less than their best to get us to raise taxes, and who are doing nothing to fix our fraud-laden financial system, or the worst period of dis-employment we’ve experienced since the Great Depression, have been making other people (never themselves) suffer, because they believe the theory that excessive public debt hurts economic growth, and that to get rid of it we must follow a plan of long-term deficit reduction. And I’m being very charitable when I opine that they believe in this theory, because the alternative is that they don’t believe it, but are just using it as an excuse to make other people suffer, and widen the wealth gap between themselves and the rest of the population.

Either way it’s important for the rest of us to demand that before we do anything more based on that theory, they should be forced to prove that it is the best theory out there about the causal relationship between public debt and economy growth. Actually, we should have made them prove that before we allowed Congress and President Obama to start playing austerity games with us way back in 2009 – 2010, because there’s been a lot of water under the bridge since then, including continuing very high disemployment, thousands and thousands of people dying due to lack of health insurance, suicide, depression-related illnesses, crime that need not have occurred, and all the effects of hopelessness that afflict the poor and the middle class during bad economic times. And now, our wonderful leaders have managed to inflict the sequestration upon us, while planning to inflict entitlement cuts on the old and the sick.

Lately, of course, the armor of the austerians, and their claims of empirical support for their view that high levels of the debt-to-GDP ratio are associated with and/or cause very low or even negative rates of economic growth has suffered repeated blows from Economics Graduate Students and Professors at the University of Massachusetts and the University of Missouri at Kansas City, in recent papers. I’ll review those studies in Part Two. In the rest of this part, I’ll evaluate the proof austerians had for their policies before this new research work appeared.

What Proof Did They Have?

So, what proof did they have, before the recent research appeared, that austerity is the best course to follow? Well, it’s been practiced all over Europe for years now, and what are the results? Only record unemployment, shrinking economies, increasing public debt, crime, public unrest, increasing suicide rates, damaged health care systems denying care to people who need them, no improvement to speak of in the economic outlook, and immense dissatisfaction all over the continent.

How about here? A stagnant economy, three steps forward, two steps back, high youth unemployment, no jobs for college graduates, layoffs in the public sector and declining services, low wages, recovery limited to the financial sector and the stock market — the kinds of results that in not so many years will produce a plutocracy, if one doesn’t exist already.

Everywhere austerity is being practiced we see a slowed economy. In some places, like Japan, we see short periods of it followed by some backing off, producing stagnation for close to a quarter of a century. In other places, like Australia and Canada we’ve seen enough of it that the prosperity they could have enjoyed is beyond their grasp.

Sure, Germany, hasn’t hit real hard times yet because their export-led economy gives them more policy space to run surpluses, but most of the nations of the Eurozone can’t run a trade surplus, so for them, continuing government austerity results in private sector losses, year after year, absent a change in rules by the Eurozone. Even the German economy has been slowing as its neighbors can afford less and less German goods, and France is seeing more than 10% unemployment and is rapidly becoming another basket case, creating the need for changing the well known Eurozone acronym to the PFIIGS. Is there an unambiguous success for austerity since the Second World War in a country running a trade deficit? I don’t know of one.

So, what about the work of Carmen Reinhart and Kenneth Rogoff? Didn’t it show that, on average, nations experiencing debt-to-GDP ratios above 90% had negative rates of economic growth? And doesn’t this provide evidence that excessive debt does cause low economic growth and even economic contraction, so that if we value economic growth, we must reduce the debt-to-GDP ratio to a much lower level than 90% before we try to use deficit spending to try again to grow?

Well, the answer to these questions is no, and no. I’ll explain the second “no” first, and consider the first “no” later on in Part Two.

Common Fallacies: First, Reinhart and Rogoff never claimed that the findings of their analysis of their very extensive cross-national, historical database supported causal inference. It’s true that after they wrote their paper and published their book reporting on their data and analysis, they recommended austerity policies and either referred to their work in that context, or have been identified by others hosting an appearance or publishing an article as having done that work to support their “expertise.” So, they talked out of both sides of their mouths; but in their work itself they acknowledge that correlation isn’t causation, and that they hadn’t proved cause and effect. And they urged further research to explore cause-and-effect relationships.

In addition, critics of their work have long emphasized that the reported association between high debt-to-GDP levels and low economic growth for all nations, had nothing to say about cause and effect in individual nations and therefore could not serve as the basis for a fiscal policy of austerity, or for Reinhart and Rogoff’s mere opinions that such a policy, expressed in other contexts should be implemented. One problem is that the association between debt-to-GDP and economic growth at levels of debt-to-GDP above 90% doesn’t apply to every instance in every nation. It’s an average, a mean or a median which is reported.

So, the association is ecological across all instances. It is the well-known ecological fallacy of social science to conclude that it applies to all or even most instances in the high debt-to-GDP category. To go on from there, and then suggest that the association is causally relevant in individual systems, is to compound the ecological fallacy with the correlation is causation fallacy. To do that is just terrible social science.

Currency Regime Variables: Read the rest of this entry →

Deficit spending by the government is merely the counterpart of private sector saving. What government deficit spending does is to permit the private sector to achieve its level of desired saving. When the latter changes, government spending ought to be adjusting in the opposite direction to offset it (unless the current account balance happens to do the job).

This very simple statement by Marshall Auerback reflects the Sector Financial Balances (SFB) Model I discussed in “A Plague On All Your Budgets.” The Sector Financial Balances Model:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0;

once again, is an accounting identity that provides a focus for macroeconomic analysis, explanation, and prediction by economists applying the Modern Money Theory (MMT) approach. The terms refer to flows among the three sectors of the economy in any defined period of time. Since we’re dealing with an accounting identity, the equation must always be valid.

So, for example, when the domestic private sector balance is positive that means that more financial wealth is flowing to that sector taken as a whole than it is sending to the other two sectors. Similarly when the foreign sector balance is positive that means that more financial wealth is being sent to that sector than it is sending to the other two sectors. When the private sector balance is negative that means that the private sector is sending more to the other two sectors and so on.

In “A Plague On All Your Budgets,” I used the SFB model to show that all four sets of projections of budget deficits then current by: the Congressional Progressive Caucus (CPC), the CBO, the House, and the Senate; all implied austerity over a 10 year period assuming that the foreign balance (the US trade deficit ) would remain at 3% of GDP or greater. Why?

Simple. Look at the equation. If the foreign balance is greater than or equal to 3% of GDP in any year, then unless the Government runs a deficit of 3% or greater, the domestic private balance must be negative. That doesn’t mean every private sector person or organization would lose nominal financial wealth over that year, but it would mean that other than temporary and illusory financial gains due to credit bubbles and accompanying excessive evaluation of assets, the accumulation of financial wealth in the private sector would be a zero sum game, with some people and organizations winning and some losing every year the private sector balance was negative because the foreign balance was at +3% and the government balance was greater than -3%. If the Government ran a surplus of say 2% of GDP in any year, then private sector wealth would decline by 5% of GDP in that year. Of course, three years of that would be an economic catastrophe

Over a period of years, and again, neglecting the effect of credit bubbles, the result sooner or later has to be constriction in aggregate demand, economic stagnation, and recession or depression. In my previous post, I concluded that even under the most “liberal” 10 year projection planned by the CPC we could expect domestic private sector savings losses from 2016 on, and even perhaps in 2015 if there were a slight deviation in the projection. We could not have too many years of those losses without hitting another great recession.

So, the CPC budget may be better than others for a couple of years, but the danger in it is that if the CPC plan were taken seriously and the budget course projected was actually implemented, then it would be deterred eventually only by the inevitable crash. Hopefully this crash would occur in very short order, rather than being postponed by another credit bubble, only to be even more severe later on.

Since my earlier post, the White House has weighed in with its budget and 10 year projection. One item in the President’s budget has received an enormous amount of attention, and that is the chained CPI proposal. I’ve written rather trenchantly about that immoral proposal here and here. But, the overall implications of his austerity budget from a macroeconomic point of view haven’t been widely discussed. The Table below includes these new projections.

You can see that the White House budget has increasingly serious austerity implications as the years go by. In my previous post, I said that all four of the budget projections in the earlier table, if implemented, could only correspond to a bleak, stagnating economic future for the United States, with the House Budget producing the worst result by far. The addition of the White House budget as a fifth alternative doesn’t change that conclusion at all.

You can see that, with the exception of the CPC “back to work” budget, the President’s budget is the most expansive of all of them in 2013 – 2015. Still, it doesn’t allow for much private sector savings in a nation still recovering from the crash of 2008, and the CPC budget is quite a bit more expansive in these early years of the projections than the President’s plan. Beginning in 2016, however, the White House budget implies that private savings must be increasingly negative with greater and greater losses of private financial wealth to 2023. Its implications for negative savings in these years are less serious than the CPC budget, but, nevertheless, the fact that the White House either can’t or won’t recognize that its budget condemns the country to a recession within “the long depression” we are experiencing now, only makes the prognosis for the economy that much more serious, because it means that, like the Europeans, the White House is likely to double down on its austerity budget in the future if its deficit/debt projections are wrong. Like Herbert Hoover, and the Eurozone oligarchs, it will believe that “prosperity is just around the corner,” if only it stays the austerity course it has been increasingly setting.

Also, apart from the SFB model’s macroeconomic considerations and their significance for declining domestic private sector wealth over time, the situation looks even worse when we take economic and political power considerations and their likely effect on the economy into account. The history of the US since 1970 shows clearly that when the private sector gets a cold, the household sector gets pneumonia.

Big businesses, the financial sector, and wealthy oligarchs will use their economic and political power to see to it that their nominal financial wealth will continue to increase even as the private sector as a whole is losing 20% – 30% of its financial wealth, over the period of a decade. That will exacerbate the already ridiculous level of inequality we see in American society, and accelerate the movement toward plutocracy in America if we allow any of these austerity plans, or any variations between the “liberal” CPC proposal and the “right-wing” House proposal to be passed and implemented.

I’ll repeat what I said in my previous post with some small changes. All of these budgets are illustrations in fiscal fantasy, or perhaps I should say, in fiscal science fiction using bad fiscal science. In taking a fiscal approach based on reducing budget deficits, all the budgets are doing the wrong thing for the economy and the wrong thing for America. They are all fiscally unsustainable and fiscally irresponsible over a decade unless a credit bubble temporarily “bails out” the Government from experiencing the ultimate effects of its actions, allowing it to run unconscionably small deficits and pretend that everything is hunky-dory until the inevitable collapse of demand forces it to face reality.

The right approach to take to fiscal policy is to design and implement programs that will guarantee full employment at a living wage for everyone who wants to work full time and is able to do so. It is not to try to force small deficits or surpluses onto an economy that is not producing them out of its own robust activity.

The government needs to let the domestic private sector determine what both the foreign balance and the domestic private sector balance should be. If it does that, then these sector balances would drive the government balance. That balance could be a surplus or a deficit of a particular size, though in the case of the United States it would probably be a large deficit, or, as I prefer to call it, a large Government addition, to domestic private sector wealth, for some years to come. But it would be determined by the wishes of people in the domestic private sector, with the Government’s role being one of accommodating the surpluses or deficits.

Seeing this conclusion, I’m sure that some readers will ask: how the United States can afford to run deficit after deficit while continuing to accumulate its national debt? Well, first, it doesn’t have to accumulate and can even pay off its national debt without inflation. I’ve explained how it can do that in my new e-book on Fixing the Debt without Breaking America.

But second, even if the US does the politically unwise thing of continuing to accumulate a larger and larger national debt, when it can avoid doing that by taking advantage of its coin seigniorage authority, it can follow that debt accumulation course without either solvency or inflation problems. Scott Fullwiler has done a very good job of explaining how that can happen in a recent series of his, which concludes here.

Scott shows that deficits can be run indefinitely by nations with non-convertible, fiat currencies, with floating exchange rates, and no external debts in currencies not their own, without either solvency or inflation problems as long as the Government doesn’t deficit spend beyond full employment. That’s the kind of fiscal policy we should be making, not fiscal policy deliberately aimed at deficit reduction. So, to all the fiscal budgeteers in Washington looking to implement long-term plans for deficit reduction, including the President: a plague on all your budgets. You’re ending America, as we’ve known it!

(Cross-posted from New Economic Perspectives.)

The underlying rationale for “a Grand Bargain” and the President’s deficit reduction budget including cuts to both Social Security (SS) and Medicare and many valuable discretionary programs, apart from the pragmatic justification, that he may be able to complete such a bargain with the Republicans and blue dog Democrats in Congress, is that the fiscal health of the United States requires that we can’t keep running annual deficits of the size we’ve been running. Why? Because that results in increases to our debt-to-GDP ratio, which in turn will cause the bond markets to drive up our interest rates higher and higher and eventually make interest on the Federal debt such a large share of the Federal Debt that we won’t have money for anything else. So, we have to implement a long-term deficit reduction plan to ensure the fiscal sustainability of the Federal Budget. To do anything else would be fiscally irresponsible.

I think that’s the essence of the President’s case for long – term deficit reduction. Then if one asks, well why make the burden fall on spending cuts rather than tax increases, the answer is that “tax increases” will never happen in today’s political climate. So, really the president has no choice, if he really wants to end this period of budgetary uncertainty, and also deal with the budget in a fiscally responsible way, then he must take the self-described “courageous” step of proposing cuts to the safety net including Social Security.

For the last few years, many of us have set forth various arguments against this case, especially with respect to safety net cuts. Some arguments are about its moral aspects showing that the “Grand Bargain” is unfair because the President’s idea of “shared sacrifice” takes no account of economic concentration of wealth over the past 40 years, or culpability for the financial/economic crash, that has created the so-called “budget crisis”. Others show that Social Security doesn’t and can’t add to the deficit. Others focus on the economic damage the spending cuts will do to the economy versus the lesser, or even little, damage that would be done by reducing the deficits through tax increases on higher incomes and wealth. Still others argue against the cuts, saying that they’re too heavily focused on domestic discretionary programs and the social safety net and are not focused on defense where we have such a large budget compared to every other nation.

All of these are good arguments and help with the pushback against the Grand Bargain. But none of them really show that the so-called problem underlying long-term deficit reduction, the eventual Federal solvency problem, is a false problem. Here’s what makes it a non-existent problem.

It’s false that If we keep running large deficits then we get increases to our debt-to-GDP ratio, which in turn will cause the bond markets to drive up our interest rates higher and higher, and eventually make interest on the Federal debt such a large share of the Federal Debt that we won’t have money for anything else.

Why?

First, running a deficit and using debt issuance to run it are not the same thing. The Congress could reorganize the Fed under the Treasury, and then the Secretary could order the Fed to create the reserves needed in the Treasury General (TGA) to deficit spend. Of course, this isn’t legal now and would require action by Congress, but it’s worth pointing out that the coupling of deficit spending to debt is due to Congressional fiscal arrangements, the rules of the game they legislated. It is not due to any immutable laws of economics, finance, or politics.

The Treasury has something else it can do to both pay down all the existing national debt, cease issuing debt instruments, and decouple continuing deficit spending from increasing debt. That option is High Value Platinum Coin Seigniorage (HVPCS).

Under authority provided by Congress in 1996 the Treasury can have the US Mint issue platinum coins with face values specified by the Secretary. So, for example, the Mint could issue a $60 Trillion coin; deposit it at the Fed, where the reserves credited to the Mint’s account for this legal tender would eventually wind up in the TGA. I’ve discussed the technicalities, history, economic, legal, and political aspects of Platinum Coin Seigniorage (PCS) in my new e-book. But the main point here, is that if the President will use HVPCS, then

– debt issuance could be ended,
– all the old debt could be paid off,

– the debt–to-GDP ratio would eventually drop to zero, and

– any possible effect of the bond markets on the solvency of the United States would be gone for as long as we conducted our deficit spending with reserves created at the Fed resulting from HVPCS.

So, in short, it’s up to the President. If he really wants to remove any possible political problem related to solvency, and any possible insolvency-based justification for deficit reduction and for cutting Social Security, Medicare, Medicaid, and other necessary programs that ought to be expanded rather than cut, then all he has to do is #mintthecoin; the $60 T coin, that is, not the trivial band-aid Trillion Dollar Coin (TDC) that will only bring the same “austerity” problem back next year.

Second, even if the President weren’t able to #mintthecoin; the deficit reduction/austerity argument would still be false. That’s because the bond markets don’t control the interest rates paid by the government on debt. The central bank does. If the central bank sets the overnight rate for reserves near zero, which it can always do, and the Treasury Department issues nothing but short-term debt at 3 months and under, then the Treasury can offer securities at a rate near zero, and keep the rates there whatever the debt-to-GDP ratio is, and even if that ratio is growing faster than GDP. This isn’t just theory. Japan is the test case for it.

Its debt-to-GDP ratio is what, 220% right now? Increases in it have had no effect on interest rates, and interest costs are not eating their budget. When confronted with Japan, austerians say that it’s an exception because most of its debt is owned by Japanese. But they never say why this fact should serve to keep interest rates down. Are the bond investors in Japan immune from wanting a higher rate from the Government if they can get it? I doubt it.

The austerians also say that if the Fed keeps the rates down, then one day US foreign creditors will demand higher returns. Well, they may demand them. But their choices are to buy the bonds, accept the lower interest rate the Fed pays on reserves in reserve accounts, invest in the US, or stop trading so much with us, so that our balance of trade improves and domestic labor markets can begin to come back with returning industries. Well, as they say, it’s all good for us. The choice they will not have is to get higher returns on Treasury Securities unless the Fed and the Treasury want them too. (Btw, this raises a question about the President’s budget. They have interest rates on 90 day Treasury Bills rising from 0.1% to 3.7% over the 10 year projection period. Their interest paid and deficit projections are based on that. But that won’t happen unless the ed and Treasury allow it.)

So, for these two reasons there are no legitimate solvency concerns for a nation like the US that has control over its currency including an unlimited ability to issue reserves. Since the whole case for austerity and long-term deficit reduction is that there is such a problem, then it seems like messaging against sequesters, debt ceiling crises, budgetary crises, austerity, and safety net cuts should lead with attempts to educate everyone to the fact that this is a false problem, and that the damage and suffering arising from austerity efforts both here and around the world is all in vain, unnecessary, and also immoral for that reason.

The Ultimate Pushback

My own anger at the “Grand Bargain” and other austerity measures is all the more acute because I know it is all unnecessary. So, I believe that to deliver the ultimate pushback, we need to persuade the majority of Americans that the President and other austerity partisans are in the process of inflicting needless damage on most Americans — on the young, the old, the under- and unemployed, the students, the foreclosed upon, the bankrupt, the sick, the poor, the middle class, and, in fact, on most everyone who will be victimized by unnecessary economic decline and stagnation in the once proud “land of opportunity.”

I think that the best way to persuade people that this is true is to tell the story of HVPCS and its ability to allow us to pay back the public debt and stop issuing any more, and then to describe the full implications of that. I’ve outlined what those implications are in my book linked to earlier. What’s important to emphasize here is that to the extent we can broadcast the HVPCS story from the rooftops over the next few months, the case justifying the “Grand Bargain” can be undermined at its core, because people will come to understand that it is the President’s choice to do the bargain, when a much less damaging course for all concerned is his to embrace.

Also, to the extent we can spread the message about HVPCS and the non-existent solvency problem, we can also strengthen ourselves for the next round in this fight. I don’t know whether the President can get his Grand Bargain; but I do know he’s been pushing for it since January 2010, at least. So, it’s pretty clear that he will keep pushing towards it in the future as the silly austerians have done in Europe and as they are doing in most of the world. As we begin to widen the sphere of people questioning the need for long-term deficit reduction, we will see the anger against it grow, and we will develop the political support we need to end the “Grand Bargain” and other forms of austerity.

The President’s new budget (Table S-2 in the budget) projects no savings (costs to SS recipients) during 2013 and 2014. In 2015 the bite is $3 Billion relative to the current CPI; and in 2016, it is $8 Billion. So, we can get a new Congress to repeal the chained CPI, if we can elect one in 2014, and I’m sure the same is true for the “health savings” cuts, as well. We can make these repeals important goals for 2014, along with substantial increases to SS and the safety net, including Medicare for All. With HVPCS, the Government of the United States can afford all of this and much more.

In addition, to possibly blocking the Grand Bargain before it can be passed, or also repealing it and replacing it with a much stronger safety net, we can also make more and more people recognize; that President Obama’s “Grand Bargain” is no “legacy”, for which he ought to be fondly remembered, but the beginning of a curse on the rest of us for which he should live in infamy even greater than Herbert Hoover’s. For, at least we can say of President Hoover, that he was a caring man who knew no better than what he did to try to cope with the Great Depression.

But, in Mr. Obama’s case, he had the example of FDR and the period of largely Keynesian economic policy and low unemployment until the early 1970s to instruct him. And even though we are beyond Keynes now with Modern Money Theory (MMT), we can fairly say that our early Keynesian experiences should have taught him that austerity doesn’t produce jobs and end “long depressions” (h/t Richard Eskow), and that only very major and targeted job-creating deficit spending will do that.

All of which is to say that the ultimate pushback against the Grand Bargain is to use HVPCS to ruin Mr. Obama’s “legacy” by blocking it, or repealing it, and then making it well understood that it was not a legacy inspired by courage at all; but a curse inspired by ignorance and the cowardice of a man who would not choose a course open to him that would save the 99% unnecessary pain, because he was afraid of the noise and fury it would cause among those whose plans to weaken and eventually end the safety net were thwarted.

(Cross-posted from New Economic Perspectives.)

OK, the President has officially proposed the “chained CPI” cut to Social Security in opposition to what the heavy majority of American voters want him to do and in contradiction with promises he and Joe Biden made during their re-election campaign. So, what punishment should we exact from this Administration, and what should we do to prevent cuts from happening in addition to signing petitions, and calling Representatives and Senators?

Immediate Punishment for Lying

President Obama and Vice President Biden clearly lied to our faces about what they would do when the Republicans came for Social Security if they were re-elected. I know politicians lie frequently during campaigns. But, I think that if we want to make them accountable, then we need to develop zero tolerance for that. A politician’s word has to become his/her bond; or he/she must be defeated as soon as we can make it possible. That has to become both the perception of politicians and the reality of how our system operates, if we’re going to save our democracy.

Accordingly, I propose that a Democratic Congressperson introduce a bill of impeachment in the House for this President as soon as possible. The grounds for impeachment could include failure to prosecute the torturers from the Bush Administration, failure to prosecute the control frauds in the FIRE sector, as well as the charge that the President lied to the American people about his intentions on SS policy in the last election campaign, in order to deceive us into re-electing him. I think that’s fraud.

It’s essential that a Democratic Congressperson introduce the bill of impeachment. Otherwise, the first step in making it clear that the party has repudiated its leadership on the safety net issue will not be clearly made. Of course, the more Democrats who sign onto the bill, the more the point of repudiation will be made. If a majority of Democrats can come together to this, then candidates of the Party will be free to run against the President on the chained CPI in 2014.

There’s certainly a reasonable chance of indictment in the House and conviction in the Senate for failing to prosecute in the first two areas mentioned, provided that the public can mount an impeachment movement (a long shot, certainly). But whether or not the President could ever be convicted in the third area of lying about SS is less important than that the issue be vetted in public at length. We need to have a debate about politicians lying to the public in order to get elected. An impeachment forum is probably the only vehicle that can teach them a sufficiently searing lesson.

Even though the Vice President guaranteed no cuts to SS even more strongly than the President, I don’t propose that he be impeached. The reason is that the fish rots from its head, and that the disposition to mess with SS surely comes from the President, completely apart from whether or not Joe Biden was lying when he delivered his flat-out guarantee, or was just acting as a tool for his boss.

Yes, yes, I know. I’m not a Very Serious Person (VSP) for making this proposal. It has no chance to pass, and little chance of getting anywhere in Congress unless people become so angry that a real movement for impeachment begins. So why do it?

I say do it to express the anger of the base. And do it to introduce the possibility of impeachment. And do it to make the point that the President and the Democratic Party are doing things that the base will never accept. The issue of “chained CPI” will be an issue of betrayal to the base for years to come, unless it fails to pass, and even then it will leave a legacy of distrust, unless the Party resists this President. And, if it does pass, then, eventually, either it will be replaced by the CPI – E (CPI for the elderly), or the Democratic Party will be replaced by another that will take this up as a cause.

Punishment for Democratic Party Openness to Cuts

Read the rest of this entry →

Dear Mr. President,

Over the past 3 years you’ve returned again and again to the idea that Social Security has a long-term solvency problem, and therefore needs “reform,” even though, as of the end of 2012, the “Trust Fund” had nearly $2.7 Trillion in it. In spite of this healthy trust fund asset balance, SS Trustee projections, say that the trust fund will be down to zero by 2033 and that thereafter, until 2086, SS will be able to pay roughly only 75% of scheduled benefits without either cuts or increased sources of revenue.

As time has passed, your favorite entitlement reform proposal continues to be the “chained CPI”, which, you claim, is a better measure of cost of living changes than currently used, but which would cut SS benefits by using a new COLA formula which makes SS cost-of-living adjustments smaller and smaller over time, as seniors adjust to price increases in commodities they buy by shifting to less pricey goods. Smaller cost of living adjustments translate to lower benefits paid out and to more years of projected “solvency” for the SS program. The objective for achieving projected “solvency” is 75 years.

Critics have replied to this proposal by pointing out that “Chained CPI” is a less accurate measure of the real cost of living for seniors than the current COLA. As many have remarked, the chained CPI will say that the cost of living for seniors has decreased when they try to protect themselves from price increases in salmon by shifting to catfood instead. So, this measure makes attempts by seniors to adjust to inflation by lowering their standard of living work against them by ensuring that they will get less money in the future to cope with inflation.

I’m sure you will agree, when you think about it, that this chained CPI measure is blatantly unfair to seniors. It is not an accurate measure of actual cost of living increases, as you and others in your Administration and in the media have contended. What makes this proposal to “reform” SS even more unfair is that many think that there is no impending SS solvency problem at all, and we wonder why you claim that there is.

Indeed, if you think that lack of full Social Security solvency after 2032 is really a problem, and you also really want to “strengthen Social Security,” then we wonder why you don’t just do this?

– Direct the Secretary of the Treasury to open a separate spending account at the New York Federal Reserve Bank on behalf of the Social Security Administration.

– Direct the Secretary of the Treasury to use his authority under 31 USC 5112(k) to have the US Mint create a $3 Trillion proof platinum coin, and deposit that coin in the Mint’s Public Enterprise Fund (PEF) account.

– Once the Fed credits the PEF with that deposit of legal tender, sweep the Mint’s account for the nearly $3 Trillion in seigniorage reserves resulting from the deposit and crediting by the Fed of the Mint’s account, into the Treasury General Account (TGA), the primary spending account of the Federal Government.

– Then transfer the $3 Trillion into the new Treasury spending account established on behalf of the SSA, giving it a balance of $3 Trillion, and direct the Secretary to invest the money in Treasury Securities, in such a way that the redemption of these beginning in 2033 will cover the projected spending beyond projected revenue.

– If projections continue to show a lack of full 75 year solvency as the years go by, then a future President can once again use a platinum coin to extend the solvency period.

This proposal has the following advantages:

Read the rest of this entry →

The Sector Financial Balances Model:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

is an accounting identity that provides a focus for macroeconomic analysis, explanation, and prediction by economists applying the Modern Money Theory (MMT) approach. It leads to a very critical line of thinking about the budget deficit projections produced for our consumption by the Congressional Progressive Caucus (CPC), Congressional Budget Office (CBO), the House, and the Senate. The US has recently had a sharp decline in its balance of trade deficit. It now stands at about 3% of GDP; which means that the rest of the world has a surplus, a balance of +3% of US GDP in its annual trade with the United States.

Assuming that surplus is unlikely to shrink anymore, we can see from the equation that unless the Government balance is less than -3% of GDP, the Domestic Private Balance in the United States economy will not be positive (a surplus, and addition to nominal financial wealth) and is very likely to be negative (a deficit, a subtraction from nominal financial wealth). So, the private sector taken as a whole will be losing rather than gaining Net Financial Assets (NFAs), every year for as long as the situation lasts.

The Table below presents the CPC, CBO, House and Senate budget projections through 2023.

The table shows that any space for the Domestic Private Sector to accumulate Net Financial Assets would quickly disappear if any of these deficit projection plans were actually adopted and worked as advertised. The CPC projections are OK for 2013 and 2014. They provide some space for continuing repair of private sector, including household, balance sheets after the crash of 2008. But by 2015, the space for savings in the private sector would be nearly gone, and from 2016 – 2023, we see nothing but deficits small enough that the domestic government balance doesn’t even cover the aggregate demand leakage due to the foreign sector balance, much less any demand leakage that the private sector desires in the form of savings. Sooner or later a budget course like that projected by the CPC would, in the absence of the banking system blowing a big credit bubble the way it did during the Clinton and Bush 43 Administrations, result in a new crash.

The CBO projections are worse than CPC’s from 2013 – 2015; but thereafter, its larger deficits are less damaging to aggregate demand than the CPC’s deficits. But they are not large enough to provide for anything but economic stagnation, unless, again, there’s a credit bubble, which would then mean a crash from mere stagnation somewhere down the line.

Read the rest of this entry →

The popular narrative in Washington, DC these days among the MSM pundits is that the Congress is “dysfunctional” in the sense that it is very difficult for it to pass a budget and rise above periodic “fiscal” “debt” and “deficit” crises. This difficulty is attributed to the failure of our representatives to rise above their party interests and to accept compromises proposed by “adults” such as the President, which would, it’s claimed, resolve our long term “fiscal sustainability”/”fiscal responsibility” problem through a “balanced” long-term $4 Trillion deficit reduction plan.

It’s also said that our representatives can’t rise above those party interests because of extreme partisanship exacerbated by gerrymandering of Congressional Districts so that most are now one party districts, in which only strong partisans embodying the extremes of each party can win primaries and then get elected. I think this story is wrong, or at least, very superficial. Here are some of the reasons why.

First, it’s clear that part of the reason for the dysfunction we see is the existence of the filibuster and various procedures related to it, that now prevent the Senate from passing legislation unless 60 Senators will support a cloture vote. In itself, the maintenance of this rule has nothing to do with partisan commitments and much more to do with the individual wish of every Senator to be able to block legislation they are opposed to.

The power to say no, is a very important one for each Senator, allowing them to get special concessions when their vote is needed to get legislation through. Senators fear being in the minority and not having the power to say no. When they are in the majority they worry that some day, perhaps soon, they will be in the minority, and will need that ability to say no to extract concessions. They also worry that removal of the filibuster, would give campaign contributors much less reason to donate to the campaigns of individual Senators and even more reason then they have now to focus donations on Congressional leaders.

This desire to protect their own privilege has trumped party interests in the Senate for a long time. The Senate’s inability to pass a large enough stimulus was due to the need for 60 votes to get a cloture vote on the legislation. The Administration believed that a stimulus bill of $1.2 to $1.8 Trillion just couldn’t be passed and that it needed one that was less than $1 Trillion in size. It had advice that the bill should be much larger from economists in the Administration and vocal and influential economists outside; but the perceived political imperative imposed by the 60 vote rule was to much to get by.

In health care reform, the situation was similar. The need for 60 votes required a health care bill that would be more solicitous of the health insurance industry. Republicans and some key Democrats were in the pocket of the industry. Their influence would have been much less if only 50 + 1 (the VP) votes were needed to pass a bill. But, as it was, Democrats like Ben Nelson, Joe Lieberman, Evan Bayh, and Max Baucus had an inordinate amount of influence on the legislation eventually passed.

In the House, there was no similar problem in getting legislation through. Nancy Pelosi would have been able to deliver Democratic votes for most anything the Administration decided to pursue, other than straight up coverage of abortion. And, on the stimulus front, a much larger one, much more heavily weighted toward spending, rather than tax cuts, could easily have been passed if the Administration had proposed one.

Second, another reason why Washington is so “dysfunctional” is because of the role of big money in campaign financing. Large corporate contributors, including banks, oil and energy companies, the pharmaceutical industry, the health insurance industry, wealthy individuals, some well-funded voluntary associations, like the Chamber of Commerce and the NRA want either to block legislation regulating their interests, or to write legislation giving them subsidies or tax cuts. So, they block or subvert public outcries for real reform to serve themselves. Because of their campaign contributions to key House Members and many, many, Senators and the opportunities the officeholders they’ve bought have to delay and block legislation in both Houses, but especially in the Senate, it is always difficult to get new legislation passed that hurts the these interests and benefits broader constituencies.

Third, partisanship isn’t by itself enough to create dysfunction. It’s also necessary to have different parties in control of each House of Congress. If the Democrats hadn’t lost the election of 2010 decisively across the country, at every level of government, due to unhappiness over the continuing recession, and the failure of the stimulus to end it, disapproval of the Affordable Care Act, and the sense of widespread injustice associated with bailing out the banks, but not the people, then both the House and the Senate would have been in control of the Democrats in 2011 and 2012. The gerrymandering we saw in 2011, which preserved the Republican majority in the House for the present term would not have occurred, and the deadlock in Congress with its “shock doctrine” applied to the budget process would never have occurred. Excessive partisanship didn’t cause the Democrats’ defeat in 2010. Rather it was their poor performance in 2009 and 2010 that made the voters want to either punish them or stay home that led to that defeat.

Which brings us to my fourth reason for doubting the view that extreme partisanship is in back of the “dysfunction” we are seeing. And that is that partisanship can sometimes create effective government, where lesser degrees of partisanship are ineffective. What are the elements of partisanship?

Well, ideology, is certainly one, and no doubt many of the Republicans are more strongly committed to a right-wing form of randian libertarianism, than any comparable proportion of Democrats are to any coherent ideology. Nearly all Republicans are really ideological on the issue of raising taxes, while the majority of Democrats resist the idea that entitlement spending ought to be cut.

But, it’s also true that many Republican officeholders are fairly non-ideological, as well. In addition, all Democrats and Republicans these days seem to adhere to an overall neoliberal philosophy with its faith in free markets, and commitment to limit regulation of markets. Democrats, of course, are less committed to these things. But looked at objectively, the differences are a matter of degree, and I doubt that they account for the deadlocks we are seeing.

Another element of partisanship is party discipline. Here Republicans seem to be more disciplined than Democrats in delivering votes for their leaders, though members of both parties seem more likely to line up behind leadership than they were, say, from the 1970s, until Newt Gingrich took over the House Republicans in the 1990s.

Now, however, we come to the third and really decisive element of partisanship. That element is the sheer desire of party members to do whatever is likely to win elections. If extreme partisanship, in the sense of wanting one’s party to win were really the explanation for dysfunction in the Government, then why don’t the party members in Congress unite behind actions that are sure to get them elected?

Look at the Republicans, they refuse to do things in Congress that would reduce the hold the Democrats have on hispanic voters. They do things all the time that are opposed to the interests of the seniors who now provide them with majority support in their demographic, and if they succeed in cutting Social Security and Medicare, why would their senior constituency vote for them again? Yes, I know they’ll try to blame the Democrats for such cuts, and perhaps they’ll partly succeed; but isn’t it easier for them, if they really want to win above all, to just not risk earning the enmity of their older constituents by striking at their vital interests?

And what about women? The Republicans seem to have a compulsion to propose and pass legislation that will clearly have the effect of hurting women. And they exercise that compulsion in most states where they have control of the legislature, and again and again in the US House. And members of their party continuously speak about women in clearly unacceptable ways, while stating their support for hostile legislation. It’s like a nervous tic with them. They can’t even speak respectfully while they’re moving to pass their negative legislation, but must offer offensive homilies while they’re passing ridiculously oppressive legislation.

And then there’s the African American vote. Across the country, Republicans are trying to disenfranchise blacks and hispanics. In addition to having policies opposed to the economic interests of many black voters; they’re trying to make second class citizens of them and other minorities. Are they trying to drive the Democrats percentage of the Black vote from between 90 to 95% to nearly 100%? Are they trying to drive the hispanic support of Democrats up to 85%? Is there a demographic group in the nation that the Republicans will avoid ticking off?

And what about their primary nominations. The Republicans are into nominating people for the Senate who can’t possibly win general elections. We’ve seen this pattern in both 2010 and 2012. They could have won the Senate in both elections if they’d nominated people who were remotely acceptable to anyone but Republicans. As for the House, they can win there now, but only because of the gerrymandering after the Democrats gave away the 2010 elections.

Which brings us back to the Democrats. Look at that vaunted “progressive” partisan politician Nancy Pelosi do in 2009 – 2010. She followed her leader, President Obama, down the line in whatever he wanted to do, and her troops followed her, regardless of the consequences for their party.

She must have known that the stimulus bill, the ACA, the Credit Card Reform Act, and the Finreg legislation (Dodd-Frank) were all dogs. So why support the compromises? Didn’t she know by the Summer of 2009 that her majority would be threatened by the ineffective stimulus and exceedingly complex and easily demonized ACA bills she had passed or was in the process of passing? Couldn’t she gauge the reactions of people across the country to “too big to fail”? Didn’t she see the outrage over the bonuses? If she really cared so much for the well-being of her party, then why didn’t she pass a second stimulus during the Summer of 2009 and challenge the President and the Senate to follow along? Why didn’t she pass the Conyers-Kucinich HR 676 Medicare for All Bill in early 2009 and then let the Senate and the Administration work on that? It wouldn’t have passed as is, but she would have headed off the tea party by doing that, and the final health care reform bill would have been a much better one than the ACA.

If partisanship is really the dominant factor in the dysfunctionality of Washington, then why hasn’t Harry Reid acted like the strong partisan he’s supposed to be by getting rid of the filibuster on the first day of the 2009, 2011, or 2013 Senate sessions or on any day in between or since? Had he done that, then the Democrats would have had their way with the Republicans for the last four years and for the present session as well. Instead, he makes informal deals with the Republicans which they instantly break, and still he hesitates to take the power which the majority is entitled to in the Senate. Some partisan he is! He’s the most non-partisan partisan in Senate history!

Finally, if partisanship is really such an important factor in dysfunction, then why is it that the Democrats are letting themselves get set up again for a stinging defeat in the 2014 election. At some level, everyone in Washington, including the Democrats knows at this point that cutting deficit spending will surely cost jobs and harm the economy. Nor can they easily predict the amount of harm that will result. The cuts being produced by the continuing budgetary crises are likely to kick the economy into another recession, absent another credit bubble, and this will be a disaster for Democrats.

President Obama is done with elections. If he gets his “grand bargain,” then he can and probably will crow about his legacy. But the Democrats in Congress will be left to pick up the pieces. They will, of course, blame the Republicans. But with Obama supporting the “Grand Bargain,” and the Democratic Leadership going along with their President because they’re “the adults” in Washington, Democratic candidates won’t be able to run against the recession and say the GB was a mistake. They will try to defend the GB, as will many Republicans. But that means that the voters, in their misery, will respond with “a plague on both your houses” and stay home.

But we know what happens when people stay home in mid-term elections after Democrats have gone against the perceived interests of their constituents. More Democrats lose their intensity and stay home than Republicans, and the result is Republican victory. The “Grand Bargain” (the Grand Betrayal, if you like) will result in Democratic defeat in the House in 2014, and probably a defeat for them in the Senate as well unless the Republicans throw victory away again, by nominating yet more ridiculous candidates to run against vulnerable Democrats. If that happens you will then see real dysfunction in Washington as the Republicans make an all out attempt to gut the social safety net, while the budget crisis politics intensifies in the lat two years of the President’s term in office.

So, I don’t agree that the problem in Washington is excessive partisanship and that what we need is some more “adults in the room.” I think the problem is too little party identification by Democrats, and too little willingness to insist on the priorities of Democratic voters. From a political point of view Democrats must not agree to any “compromise” that will cast them as being responsible for spending cuts to core Democratic programs. They must choose government shutdown before that. They must be seen as defending core programs of the people they represent; and they must wait for the Republicans to break under the pressure of being charged with shutting down the Government rather than getting new revenues from the wealthy to avoid cutting Medicare and Social Security.

For the Democrats, trading cuts in defense for entitlement cuts is a bad trade. They should never agree to that. If the Republicans want their defense spending, then they should be forced to agree to deficit spending, or to higher taxes on the wealthy.

From my point of view it’s better for the economy if the Republicans get off the deficit hawk kick and agree to fund defense spending through deficits. Then the Democrats should back off running on “fiscal responsibility” in 2014 and let the Republicans off the hook for their deficit spending on defense, while pushing for more deficit spending on jobs programs. Whatever Democrats do, however, if they want to win in 2014, they must not agree to any “Grand Betrayal” that is neither in the interest of their party; nor most of the country.

Here are the realistic choices coming up, absent a “big move” by the President to change the political backdrop of fiscal policy.

– The Government could be shut down awaiting the Republicans to back off their spending cut stance;
– The Republicans and Democrats could agree on some compromise involving increased revenue and decreased Government spending including entitlement spending, using a 3 – 1 ratio;
– Both parties could back off the sequester cuts, and the Republicans could back off the upcoming continuing resolution and debt ceiling crises.

The third of these choices is the best of the three for the economy, the country and the Democratic Party. To get there however, the Democrats in the Senate will have to refuse to agree to the Grand Betrayal, and no doubt will have to endure a Government shutdown over the debt ceiling. Unless they do that, the election of 2014 will be a Republican victory.

Just above, I mentioned a “big move” by the President. That move, of course, is using High Value Platinum Coin Seigniorage (HVPCS), to provide enough reserves in the Treasury’s spending account to pay off “the national debt” as it falls due, and to avoid issuing new debt for at least 15 – 25 years. The President has so far resisted doing that. But if he were to use HVPCS, he could take future debt ceiling crises off the table, and also remove any plausible rationale based on deficits/debts for any further spending cuts at this time. The normal rationale for tax increases, that “the Government needs the money” would also be gone.

So, politics in Washington would shift away from discussion of deficit spending and debts and towards the kinds of policies that would be good for America in both the short and long runs. That kind of change would increase the chances for Democratic Party victory in 2010, and would also be the beginning of a decent legacy for the President. It would also be far better for the United States than austerity politics has been. So, in this case, partisanship, in the form of a change in the fiscal foundations of the United States, which surely favors the Democrats, would also be what is best for the country. So much for the dysfunction of “partisanship”!

(Cross-posted from New Economic Perspectives.)

Jack Foster proposed a framing document for High Value Platinum Coin Seigniorage, in a recent comment he made on one of my posts. In response, I posted a six-part blog series to accommodate readers who prefer the blog format.

Some, however, will want to read or reference a single framing document, rather than six separate posts, and I prefer it in that form myself because it facilitates seeing the whole picture provided by the many and diverse objections to PCS and HVPCS. So I’ve provided one here. I think the full picture provided by the many objections is that of opposition grounded in a fierce unwillingness to change familiar ways of performing Federal deficit spending requiring debt issuance, even though many of those offering objections know very well that the Government is perfectly capable of creating its own high-powered money without selling debt instruments, and even know that all money creation in our financial system is ultimately, if most often indirectly, based on the constitutional authority of the Congress, and its delegation of that authority to other parties.

What can one say about this except that it is mere conservatism and grounded in fear of the unknown at best, or worse, grounded in a desire to continue to benefit from the financial system in one’s own, rather than the public interest? I’m not saying that conservatism is never rational, or that it is unjustified in all cases. But I think my evaluation in the series, and the full framing document indicates that many, and perhaps all of the objections that have been offered to HVPCS reflect a transparent bias to preserve the present system and are relatively easy to turn aside, because they are a stretch reflecting the bias of the people offering the objections.

In any event, that’s my view of the matter, and I leave it to others to read the framing document and to evaluate for themselves, whether the pattern I’m drawing out of the objections makes sense to them. In doing that I hope others will join me in continuing to gather objections to HVPCS I haven’t covered here, and to record these in comments, so that the document may be kept up to date and may become the primary reference for objections and replies to HVPCS. Let’s try to transform this into a crowd-sourced document, so that it becomes a true community document. I’ll be looking forward to your comments and your contributions!

(Cross-posted from Correntewire.)

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the five previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, three, four, five and this post (Part Six), considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this concluding post, I’ll consider some further political/economic objections to PCS and HVPCS.

Destroys confidence in the dollar, here and abroad because it reveals the reality that our fiat money isn’t “backed” by anything

This one really makes me see red because it reflects 1) the arrogance of the complainer who thinks he or she is fit to know the reality of the fiat money and our present financial system, while the average citizen is not; 2) the attitude of the complainer that it is OK to maintain the platonic “noble lie” that the operation of our fiat money system is different from the way it really works; 3) the very questionable judgment that if everyone knew that US fiat money was just that, then that would destroy confidence in the dollar, even though it’s well-known that all the world’s currencies, including our own are fiat currencies; and 4) the attitudes of the globalizing elites that average citizens shouldn’t know what they’re about. In a word, the anti-democratic character of this objection to HVPCS really creeps me out.

But recognizing that this objection is profoundly anti-democratic also makes it very clear that HVPCS is very much about the larger process of turning back from the evolution toward global plutocracy we see all around us. And it is also about turning back towards both political and social democracy and a decent life for all.

Destroys budgetary discipline

This is another rich one. The idea here is that as long we think we are short of public money, then we will be more disciplined in our spending, and will make sure that the government deficit spending we do approve is only that spending that is necessary for public purpose. On the other hand, if we use HVPCS, then it will be clear that we can have as much money as we choose to have, and so we will lose our fiscal discipline and responsibility, and just spend willy-nilly on foolish things.

Too bad the world and our public spending habits aren’t as simple as this picture suggests. But, they’re just not.

We now have more than 35 years of experience with austerity politics in the sense that powerful groups in the political system have warned about our deficit and debt problems all that time, and have emphasized the importance of evaluating fiscal policy based on its impact on reducing deficits and balancing budgets, rather than the larger economic and social benefits and costs of those policies.

The record during this time shows that the US has increasingly suffered from a profound fiscal irresponsibility in the sense that we have failed to spend what was necessary to achieve larger public purposes like full employment, decreasing inequality, widely distributed gains in standard of living that keep up with productivity, developing a first class educational system, developing alternatives to fossil energy to serve as the new basis of our economy, developing programs to meet the challenges of environmental sustainability and climate change, increasing family integration, and providing first class universal health care to all Americans as a right. So, for more than 35 years now, our politicians have poor mouthed about not being able to afford expanding our domestic social safety net and discretionary programs, while proceeding to spend lavishly on defense industries, and insisting that we can afford that, all while our country more and more develops the social and economic characteristics of a third world nation.

In short, the last 35 years show that placing artificial constraints on the amount of public deficit spending we will do hasn’t worked to produce responsible fiscal policy that fulfills public purpose. I think that’s because when politicians and people focus on indicators like the debt and deficit to guide fiscal policy, instead of focusing on the real impacts of fiscal policy, that opens the way for well-funded elites to obscure issues about those real impacts and focus instead on narrow financial details that the elites understand, because they employ armies of analysts to understand them, while the public has no hope of understanding them, and so is in a very bad position to defend its interests.

So, when we look at the history of politics since Jimmy Carter decided we ought to try to balance the budget, and Alice Rivlin assumed a dominant position in DC thinking about fiscal policy, we can see that practicing artificial scarcity in fiat money creation hasn’t resulted in our becoming more fiscally responsible, but precisely the opposite. We have to acknowledge that we’ve been focusing on the wrong things, and we have to stop using them as a way of evaluating fiscal policy and government spending.

The national debt and reducing deficit spending should have no part in our evaluation of our fiscal responsibility. All that ought to matter is evaluating the real effects of Government spending on the economy, politics, society, culture, our resources, and the environment. That’s the sort of evaluation that should define budgetary discipline.

Budgetary discipline in that sense is unrelated to HVPCS. It has nothing to do with whether we have, or do not have $60 T in the TGA. It has to do instead, with whether we can mobilize ourselves to make Congress and the Executive accountable to our views about public purpose. Right now they are not.

Instead, they are using their austerity narrative as an excuse to weaken rather than strengthen the safety net. They are using it to refuse to legislate Medicare for All, even though polls have shown for many years that 2/3 of the population wants Medicare for All. They are using it to refuse to enable full employment, including a Job Guarantee for everyone who wants to work full time. They are using it to refuse to make available the funding we need to create a first class educational system. They are using it to refuse to fund sorely needed infrastructure repair and modernization. I can go on and on. But the main point is that the present system of funding Federal deficit spending isn’t working to fulfill our public purposes.

It’s time to change that system and to have the change reflect the truth that there can be no shortage of money in our system, only shortages of resources, labor, skills, know how, and well-being. The budgetary discipline we ought to pursue is the discipline of ending the real shortages we have, by using the money we can generate in whatever quantity we need to implement government programs that will help us end these other, real, shortages.

Causes the Government bureaucracy to expand and crowd out private sector activities

HVPCS is itself unrelated to the size of government compared to the size of the private sector. We can have HVPCS, use it to pay off the national debt, use it to cover deficits for many years to come, and still choose to have a lower percentage of economic activity performed by government rather than the private sector. Even if we run large deficits, covered by HVPCS, those deficits can be devoted to shoring up private sector growth rather than government growth. Whether we do this or not is our choice, and either shrinking the Government, or growing the Government is compatible with HVPCS.

Having said the above, that doesn’t mean that we should decrease the relative size of the government compared to the private economy. In recent years, we have shrunk the government bureaucracy substantially as a percentage of employment. That shrinkage has not led to good times or private sector growth. It has led to the opposite.

The privatization of a lot of government work since the 1970s hasn’t led to a reduction in the costs of funding the activities that used to be performed by civil servants. Instead, it’s clearly increased those costs. Contracting out was supposed to be cheaper, because the government would avoid expensive fringe benefits, including retirement costs, and supposedly would reduce the cost of services through competition. However, this theory has proven to be incorrect. Civil servants are cheaper than contractors, and they perform as well or better than contract workers, perhaps, because they have little incentive to drag out and prolong work to ensure that they will be employed in the future.

In addition, there is no correlation over time in the United States between prosperity, economic growth, and a smaller Federal government. If anything the correlation is negative. There were better times, lower unemployment, and faster growth from the end of WWII through 1980 when the Government’s percentage of the economy was higher than it has been during the period from 1981 to the present. So, maybe we could benefit from some more “crowding out” of the private sector by Government than we now have; but whether we would benefit from this or not, the issue of relative size of the government isn’t directly related to whether HVPCS is used or not.

Conclusions

Here are my conclusions based on this six part examination of HVPCS, including all the current objections I could find to the Executive Branch using it to fill the public purse.

• Using HVPCS would demonstrate to the public that: the Federal Government’s budget isn’t like their budget; the Federal Government can never run out of money if it doesn’t choose to; there is no need to cut either revenue or spending because we must reduce the deficit; we can use revenues from HVPCS to pay off the national debt as it falls due, and there isn’t any need to pursue the current agenda of austerity and “shared sacrifice.” There is just no need for austerity and we ought to quit wasting time and causing harm by either discussing it or implementing it. Take it off the table!

• So, HVPCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.

• HVPCS strikes at the domination of the global financial and political system by Wall Street and the big banks. They will do everything they can to remove the power to use it from the President and the Treasury. That is why HVPCS must be used by the President ASAP! He has the main chance to bring change now. He should take it!

• Progressives need to fight for retaining the Executive’s capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose.

• High Value Platinum Coin Seigniorage using coins having $30 Trillion or greater value is most probably a legal alternative for the Treasury to use to fill the public purse. I say most probably, because no one can tell what will happen in response to a Court challenge. However, the likelihood is that the court will not grant standing to any challenger. Even it does, the odds are with the Executive Branch due to the clear language of the coin seigniorage legislation, the relationships between the Fed and the Treasury specified in the Federal Reserve Act, and the unitary executive doctrine.

• There are a host of other economic, political, institutional, and political/economic objections to using HVPCS, they range from dismissing it as “weird,” “crazy,” etc. scary to most people, characterizing it as “printing money” and “inflationary,” projecting a political firestorm and projecting political paralysis in Congress if PCS is used at all, worrying about letting the Republicans off the hook for their irresponsible behavior in causing repeated fiscal crises, worrying about appearing to act like a “banana republic,” worrying about the possibility that HVPCS will elicit “black swans” with terrible unanticipated consequences, warning that using HVPCS will violate “a social norm,” projecting a collapse of investor confidence in the US and its currency and loss of reserve currency status, projecting rising interest rates from the bond traders, warning that HVPCS shouldn’t be used because of the maxim “first do no harm,” warning that minting a platinum coin is the first cousin of defaulting on the debt, because the act will convince financial markets that we can’t manage our affairs, warning that using HVPCS will compromise the independence of the Federal Reserve, and the related objection that it would destroy the institutional structure of the financial system. warning that it would destroy confidence in the dollar because it will reveal the reality that our money is “unbacked” fiat, warning that it would destroy budgetary discipline, and that it would cause “crowding out” of the private sector by the government bureaucracy.

  Looking at this list of objections and the replies I’ve offered in this series, I suggest that every one them, with the possible exception of the inflation objection is insignificant compared to the likely benefits of using HVPCS in place of debt issuance to pay off old debt and perform deficit spending without issuing any new debt instruments.

  Even the relatively light austerity being practiced thus far is costing the United States $3.4 Trillion per year in GDP and is leaving more than 30 million dis-employed. If the coming round of austerity from the Congress and the President materializes in the next few months, and we experience another recession, we may end up losing another $1 Trillion off GDP, along with another few million dis-employed.

  So, lifting the burden of austerity politics on the 99%, and ending debt ceiling crises, sequesters, and ideological budgetary conflicts, and their attendant effects on economic activity and unemployment, far outweighs the likely negative consequences of any or all of the rest of the objections against HVPCS, apart from demand-pull inflation, which, I’ve argued, is a very unlikely outcome of HVPCS.

  In this series, I’ve tried to show that there isn’t a good reason in the world not to use HVPCS. Of course, one can’t prove a negative, so I really haven’t shown that. But I hope I’ve shown that it’s costing far too much to continue down the road of debt issuance, in the context of the many objections I’ve reviewed.

  The important cost of doing what we have been doing, is not really the interest on the debt itself; that’s only fiat currency which the Government can always make. it’s the political consequences of the national debt, which are bipartisan action to practice austerity and “shared sacrifice,” that really count. We need to get rid of this before it destroys everything we hold dear. The way to do that is to use HVPCS to get of rid of debt and cover government deficits for many years. HVPCS is a way out of the trap we’ve built for ourselves. We need to get on with it, now!

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is the sixth and concluding part of that document. I’ll make available the whole document shortly.)

(Cross-posted from New Economic Perspectives.)