Last week, I was struck by the following three (live-link) items from Huffington Post:
- Debt Ceiling Debate Cost Taxpayers $18.9 Billion, Study Finds
- “WASHINGTON – Once again, Speaker John Boehner (R-Ohio) and President Barack Obama find themselves in a standoff over how to raise the nation’s debt ceiling.”
- Louie Gohmert On Debt Ceiling: `That’s Our Leverage’
And, more recently, there was this:
John Boehner (R-Ohio) said that giving the president control of the debt ceiling is “silliness.”
“Congress is never going to give up this power,” the House Speaker told Fox News Sunday. “I’ve made it clear to the president, that every time we get to the debt limit, we need to cut some reforms that are greater than the increase in the debt limit. It’s the only way to leverage the political process to produce more change than what it would if left alone.”
In fact, the only leverage the Repulbican have is the willingness of Obama and Geithner to let the GOP take the blame for not paying the nation’s bills. But, with another round of debt-limit roulette approaching, it is important that serious people understand what is going on. Here are the relevant clauses of the U.S. Constitution:
- The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States … [Article 1: Section 8: Clause 1]
- To borrow Money on the credit of the United States; [Article 1: Section 8: Clause 2]
- To coin Money, regulate the Value thereof, and of foreign Coin, … [Article 1: Section 8: Clause 5]
- No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law … [Article 1: Section 9: Clause 7]
- The validity of the public debt of the United States, authorized by law … shall not be questioned. [Amendment 14: 4]
In short, Congress has the duty to pay the expenses they’ve appropriated, and to cover those expenses they have the power to collect taxes etc., to borrow money, and to mint money.
But, Congress has delegated all of these duties and powers to the Treasury. Per the Treasury’s web site:
The basic functions of the Department of the Treasury include:
- Managing Federal finances;
- Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.;
- Currency and coinage;
- Managing Government accounts and the public debt;
- Supervising national banks and thrift institutions;
- Advising on domestic and international financial, monetary, economic, trade and tax policy;
- Enforcing Federal finance and tax laws;
- Investigating and prosecuting tax evaders, counterfeiters, and forgers.
Congress has explicitly retained the power to limit the amount that the Treasury can borrow but, in 1996, authorized the Secretary of Treasury to mint coins of arbitrarily large “denominations”:
The Secretary may mint and issue platinum bullion coins
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
Not a dollar of that money can be spent without a congressional appropriation, but there is no longer any need to borrow money to pay congressionally appropriated expenses. And, now, the only crisis is the White House’s refusal pay the government’s expenses, except with borrowed money. That intransigence is what cost the taxpayers $19 billion and jeopardized the nation’s credit rating during the last round of debt-limit roulette.
Every year since the Consittution was passed, the government has covered part of its appropriated expenses via the seigniorage (markup) on the minting of coins. Last year coin seigniorage totaled about $10 billion, i.e., roughly 1% of the tax deficit. It’s also worth noting Lincoln printed “green backs” to pay the cost of the Civil War. So, we’re not talking about an unprecedented approach to funding congressional appropriations.
During the days of the gold standard, issuing new money would have diluted its value relative to the supply of gold. Today, however, the dollar is essentially a transferable tax credit, and taxation controls both the supply of and the demand for dollars.
Paul Krugman claims that “in ordinary times” borrowing money is less inflationary than issuing an equivalent amount. The MMTers, particularly Scott Fullwiler, disagree and note that anyone can take their Treasury bonds to a bank and sell or pawn them in exchange for a roughly equivalent amount of freshly issued bank money, i.e., credit in an account.
In fact, the monetization of non-monetary financial assets (e.g., treasuries) is very big business now, and it is no longer just banks that are doing it. Per William F. Hummel:
[...] non-bank financial institutions (NBFIs) can create money by selling an interest in short-term paper, and providing checking facilities against that paper.
Banks were once the main source of credit. Today NBFIs such as mutual funds, pension funds, finance companies, and insurance companies issue far more credit in total than do banks. Indeed, deposits created by banks now comprise less than 20% of the total credit market debt.
So, why are Geithner and Obama so insistent on spending only borrowed money? All U.S. politicians face the same problem: how to do the bidding of their sponsors without alienating their constituents? Both Obama and Boehner want to cut entitlement benefits, but neither wants to accept the blame. Per ABC News:
… 78 percent in this survey oppose cuts in Medicare in order to address the federal debt (indeed 65 percent “strongly” oppose it); 69 percent oppose cuts in Medicaid, the insurance program for the poor (52 percent strongly) …
And that includes a majority of GOP voters.
And, the myth that the GOP have the nation over a barrel gives both sides the ability to claim that they are fighting for the interests of their base and the nation. The GOP is “forcing” Obama to shrink our bloated out-of-control nanny state, while Obama will ultimately cave to save the nation’s economy and America’s fiscal credibility around the world. Meanwhile both will have succeeded to opening the door to further austerity, which is what their sponsors want. But remember that there’s nothing the GOP can do to prevent Geithner from minting our way out of this fiscal nonsense — the enabling legislation has been on the books since 1996.
And, yes, there is a limit to how fast we can issue new money (relative to GDP growth) without incurring a need to raise taxes or suffer inflation. That’s obvious to and acknowledged by everyone I’ve read on the matter. And that, of course, is exactly what the elite don’t want to happen.
In any case, we don’t have to pay the nation’s bills with borrowed money.
UPDATE: I recently ran across an interesting item on Germany’s astoundingly fast recovery from the Great Depression:
Hitler introduced a number of measures that pulled Germany out of the Great Depression before any other major industrial power.
Firstly, an economic expert, President of the Reichsbank Hjalmar Schacht, was put in charge of the economy (none of the leading Nazis knew much about economics) as Minister of Economics.He decided to implement Keynesian economics on a massive scale.
… Small and medium sized businesses, as well as big business, were given generous government contracts, enabling them to hire more workers to meet the orders, thus reducing unemployment even further. All German companies were also offered cheap government loans so they could modernize their machinery, shopfloors, and other equipment. [...]
As for agriculture, farmers were also offered cheap government loans to buy fertilizers, tractors, livestock and everything necessary to modernize [...]
All this was paid for with MEFO Bills, a government credit note redeemable 5 years after its issue to the company or borrower; thus, anyone taking up the loans or contracts had, of necessity, to order what they wanted from German companies, which were ordered to accept MEFO Bills as payment.
All this reduced German unemployment to virtually zero by the beginning of 1936. The commensurate reduction in government expenditure on welfare payments as unemployment fell boosted government finances, as did the rapid increase in tax revenues as the number of those in employment rose.
[...] Rearmament WAS NOT a major factor in this – rearmament didn’t begin on a wide scale under the Nazis until well into 1936, when the German economy was already out of depression,and was strong and healthy.
So Germany’s recovery financed by government-issued (fiat) money occurred within three years, while our recovery financed by borrowed money required at least another two years. Per the Wikipedia on U.S. recovery:
By 1936, the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high at 11%, although this was considerably lower than the 25% unemployment rate seen in 1933. In the spring of 1937, American industrial production exceeded that of 1929 and remained level until June 1937. In June 1937, the Roosevelt administration cut spending and increased taxation in an attempt to balance the federal budget. The American economy then took a sharp downturn, lasting for 13 months through most of 1938. Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.
It appears that Obama is about to repeat FDR’s error and for the same reason: fear of too much debt and the desire to be “fiscally responsible.” Note that I’m not opposed to borrowing, especially when we can borrow at effectively negative interest rates. My point is that we should not feel constrained to borrow.