I’ve been reading about and advocating the Trillion $ Coin option as a means of avoiding the US Debt Ceiling impasse on US Blogs for some time now, but have always sought to leave the lead role in writing diaries on the topic to legal or economic experts. And just when I finally decide to weigh in in a more substantial way Krugman decides to write more or less exactly what I wanted to write:
Barbarous Relics – NYTimes.com
There will, of course, be howls from the usual suspects if that’s how it goes [and the President decides to mint a Trillion $ coin]. Some of these will be howls of frustration because their hostage-taking plan was frustrated. But some will reflect sincere horror over a policy turn that their cosmology says must be utterly disastrous.
Ed Kilgore says, in a somewhat different way, much the same thing I and people like Joe Weisenthal have been saying: what we’re looking at here is a collision of worldviews, one might even say of epistemology.
For many people on the right, value is something handed down from on high. It should be measured in terms of eternal standards, mainly gold; I have, for example, often seen people claiming that stocks are actually down, not up, over the past couple of generations because the Dow hasn’t kept up with the gold price, never mind what it buys in terms of the goods and services people actually consume.
And given that the laws of value are basically divine, not human, any human meddling in the process is not just foolish but immoral. Printing money that isn’t tied to gold is a kind of theft, not to mention blasphemy.
For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change.
Now, the money morality types try to have it both ways; they want us to believe that monetary blasphemy will produce disastrous results in practical terms too. But events have proved them wrong.
And I do find myself thinking a lot about Keynes’s description of the gold standard as a “barbarous relic”; it applies perfectly to this discussion. The money morality people are basically adopting a pre-Enlightenment attitude toward monetary and fiscal policy — and why not? After all, they hate the Enlightenment on all fronts.
Because that is what it comes down to, a fundamental dispute over the nature of money itself. And so I have been disappointed that our own resident economic and monetary experts – Jake, Chris Cook and Migeru et al haven’t weighed in and contributed their undoubted wisdom on this topic. So this is my attempt to provoke some informed discussion on the topic both here in Europe and also on a more world wide basis. Because it seems to me that the ECB (driven by the Bundesbank) has been as prone to the logical fallacies endemic to the US debate.
First, please let me explain the issue as briefly as possible:
The US national debt has been increasing ever since it was first measured. Ronald Reagan tripled it; GW Bush almost doubled it during their terms of office. Vice President Cheny famously said to Paul O’Neill, then Treasury Secretary, “You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due”. The Congressionally approved debt ceiling was increased on a regular basis, a process which came to be regarded as routine.
Of course, when a Democrat like President Obama wins re-election, that is entirely a different matter, and the Republican controlled House of Congress has refused to increase the debt ceiling unless the President makes even bigger spending reductions to “entitlement programs”. The last time this came up, Congress waited until the last moment to increase the debt ceiling, and the US’s credit rating and economy was damaged as a result.
The main argument against increasing the debt ceiling further is that the total value of debt has become unsustainable, and that the current generation is unjustly forcing their children and grandchildren to pay for their current benefits. Certainly US debt as a proportion of GDP (103% in 2011) has increased substantially in recent years, and particularly in response to the financial crisis and depression which followed it. However it is still broadly comparable to other major economies, Germany (82%), United Kingdom (83%), European Union average (83%), Canada (85%,) and much lower than Japan (230%).
President Obama hasn’t opposed reducing the level of debt, merely arguing that measures aimed at doing so should be “balanced” as between tax increases and expenditure reductions. Republicans have opposed all tax increases, and the recent agreement to delay the onset of the “Fiscal Cliff” by two months by allowing some temporary Bush era tax cuts to lapse was only passed because it was supported by the vast majority of Democrats (and a minority of Republicans) in the House. The crisis over the “Fiscal Cliff” is commonly misunderstood as being about reducing excessive debt, whereas it is actually about trying to avert a recession caused by trying to reduce debt levels too quickly.
And that is the nub of the matter. Republicans and “Austrian” economists argue that the only way to reduce debt is to reduce “bloated” state expenditures on entitlement programs, whilst Democrats and Keynesian economists argue that the current historically high level of debt is
- A normal cyclical response to the fiscal crisis
- Is not in itself a problem as it is being funded at historically low interest rates
- Is not caused by entitlement programs which are solvent and funded by employee tax contributions
- But is the consequence of historically low tax rates, and also the consequence of unfunded wars in Afghanistan and Iraq.
Enter the current Debt ceiling crisis which Krugman has compared to a kidnapper threatening Democrats to cut spending or else the economy gets it in the form of a crash caused by the US defaulting on its debts.
There is a debate as to whether Republicans would actually follow through on this threat, as it is their donor base – businesses large and small, defense contractors etc. – who would suffer most immediately from cutbacks in government procurement contracts and an economic crash. Yes, unemployment would rise rapidly and damage Democrats at the polls, but it is the business class who would most immediately see a rapid reduction in their profits if confidence in the US economy were to collapse. Obama is in power for the next 4 years in any case now, and business simply cannot afford to wait that long for economic recovery just to achieve their cherished entitlement spending reductions.
Many thus see the current crisis as another gigantic and damaging display of economic brinkmanship to see if Republicans can force Democrats into massive spending reductions in return for an increase in the debt ceiling. Figures as high a $3 Trillion in spending reductions have been mentioned, with the debt ceiling only increased on a temporary basis, and by less than the spending reductions to be imposed.
Never mind that such spending cuts would crash the economy, devastate tax revenues, and quite possibly increase the national debt as a proportion of GDP. This is class war, not rational economic debate, and a striking feature of Republican negotiating positions has been a refusal to actually cost the impact of any of their policy proposals. This is especially the case when it comes to identifying precisely which entitlements should be cut. Republicans have steadfastly refused to name and cost the precise cutbacks to be imposed, referring vaguely to closing loopholes and reducing waste, so that they will later be able to blame Democrats for the actual choices made.
On the Democrat side, many doubt President Obama’s negotiating skills, and fear that his attempt to act “bipartisan” and remain the “adult in the room” will result in a historic dismantling of large parts of the Democratic “New Deal” and “Great Society” welfare programs. Many centrist Democrats accept the conservative framing of the crisis as being due to unsustainable expenditures, and dispute only the scale of the cutbacks to be imposed.
Enter, stage left, an utterly different legal and monetary argument entirely. Apparently there is an hitherto obscure clause in US legislation – first alluded too by a blogger called Beowolf in 2010 and developed by Letsgetitdone on Daily Kos – that allows the Secretary of the Treasury to mint platinum coins of any denomination whatsoever to commemorate certain events.
31 USC § 5112 – Denominations, specifications, and design of coins
(k) 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 time.
In theory, therefore, the President could order the Secretary of the Treasury to mint a 1 Trillion $ coin and deposit it with the Fed thereby, by the arcane laws of Government book-keeping, reducing US Debt by 1 Trillion dollars, and taking the current debt ceiling out of play for the next year or so.
The objections to this gambit have been primarily legal, economic and political. Let us consider each in turn.
1. Legal argument
The legal argument has been that the provision in question was for the purpose of minting commemorative coins of much lower denominations, and was never intended as a mechanism to make a major reduction in US debt. Even proponents of the idea do not dispute this point. However, they say, the language of the provision is clear and unambiguous, and would thus not be overturned by a Court on the basis that the framers of the provision never intended it to be used in this way. In recent days the former Director of the Mint who co-wrote the provision in question together with an increasing number of legal scholars have come to that conclusion. However there is no telling what a Republican and conservative dominated SCOTUS would decide on the issue, although arguably, no one or no body would have standing to bring such a case.
However there is an even more fundamental argument in favour of the Coin. The US national Debt has been run up by a succession of administrations spending money on programs duly authorized by Congress. For instance the 2012 Federal Budget, duly approved by Congress, adds a $1.3 Trillion deficit to the National Debt, but Congress did not lift the debt ceiling to actually enable the Government to fund that debt. Does the 2012 budget supercede the older Debt ceiling limit even if it did not specifically amend it?
For President Obama to stop spending on some of these programs in order to remain below the debt ceiling could actually be construed as him breaking the law. Which programs should he cut? If he cut (say) pensions, could pensioners not sue him for discriminating against them and not paying them moneys he was instructed by congress to pay out? On what legal basis could he cut some programs and not others? The Republican dominated House of Congress is currently suing the President for not fully implementing the Defense of Marriage Act (DOMA). Expect the Democrat dominated Senate to sue him if he fails to pay budgeted payments to pensioners in full.
In other words, the Debt ceiling law conflicts with all other legislation passed by Congress which contribute to the US exceeding the debt ceiling when implemented in accordance with such duly passed legislation. When considered in the context of the 14th. Amendment which prohibits the US from defaulting on its debts, the debt ceiling legislation could actually be found to be unconstitutional. The point is that the debt ceiling law does not amend previously approved spending legislation, although a Court could conceivably find that it supercedes and thus over-rides previously approved legislation. But how is the President to decide what legislation not to implement – the defense budget, Medicaid? The potential for further political dispute and litigation is endless.
The bottom line, as far as this line of legal reasoning goes, is that the President may have no choice but to mint a large denomination coin in order to comply with both the Debt ceiling and previously passed expenditure programs. Too be clear, the President cannot simply mint coins for his own use, or to fund some of his own favoured programs not approved by Congress. the only purpose, in minting the coin, would be to enable the President to comply with both the Debt Ceiling and other spending programs duly approved and mandated by Congress whilst not breaching the 14th. Amendment which outlaws defaulting on historic debts.
2. Economic argument
The economic argument has been amply made by Krugman in a succession of increasingly strident and confident posts. To summarise: Swinging cuts in expenditure is the very last thing the US needs as it tries to emerge from recession. Increasing the amount of money in circulation (as could be an indirect consequence of depositing the coin in the Fed) will not be inflationary so long as the US economy remains mired in a liquidity trap, with negative real and nominal interest rates, and with the economy operating way below capacity.
If I understand the economic landscape correctly, Krugman is actually a pretty mainstream Keynesian economist on this. Modern Monetary theorists go much further: Governments should print/mint money to fund their expenditures, and use increased taxation to mop up excess liquidity at times of rapid economic growth to prevent excessive inflation. Furthermore, some inflation is actually desirable at times of huge economic inequality as a means of reducing the value of historically accumulated wealth, and thus the relative scale of wealth inequality in society – which in itself seen as an economically inefficient, not to mention a socially iniquitous feature of recent economic trends. (Correct me if I am getting this wrong guys!).
3. Political argument
When I first started to articulate the case for the Trillion $ Coin, I was poo-pooed by liberal political commentators like Booman who regarded the whole thing as blatantly illegal and politically silly. Just because the the Republicans are crazy to threaten default if they don’t get their way on “entitlement” reductions, doesn’t mean they President can suddenly go all crazy and act in a blatantly unconstitutional and politically silly fashion.
I have little doubt that Booman was fully in line with mainstream establishment Democratic thinking. The whole system depends on Obama acting as the “adult in the room” even if all around him go crazy. The markets would be spooked, and therefore the establishment in both parties would be spooked. However I also have little doubt that many political liberals in the US also basically agree with the mainstream “Austrian” or “Chicago” school of economics, which is now virtually the only sort of economics taught in Economics 101 and propagated in the MSM in the US. To them, for the President to instruct the Treasury to mint a Trillion $ Coin is not only legally dubious and economically all wrong, but also politically very dangerous. It strikes at the very heart of their belief if the intrinsic and real value of money and the “obvious” inflationary implications of simply minting more.
There is no doubt that some Republicans are salivating at the prospect of the President minting a Trillion $ Coin as this would put him at odds with much of the Democratic as well as Republican and independent political and economic establishment of the country. The President has been consolidating his position since his re-election, and for him to act in such a fashion would be construed, by the MSM, as the desperate act of an unscrupulous man. Never mind that the alternative would be an (unconstitutional) default and economic melt-down.
For all of the above reasons, I expect the President to mint such a coin only as a last resort after every alternative has been exhausted. First he will inflict swingeing defense and discretionary expenditure cuts so that even the Republican donor base will scream at the cancellation of Government contracts. Overseas military bases will be closed, the Afghan withdrawal accelerated, and perhaps even a few private sector prisons closed. If all of this doesn’t bring Republicans to heel, he can always keep the “Coin” jangling in his pocket. Interestingly, White House Press Secretary Jay Carney has referred all queries on the coin to the Treasury…
If the President does end up minting the coin, you can expect Republicans to go absolutely ape-shit, as to do so strikes at the very heart of their economic ideology. With one bound the President will be free of their debt ceiling shenanigans and almost all of their leverage, as controllers of the House, will be lost. In a fit of peak, they would probably seek to impeach the President, never mind the fact that impeachment is a process which should only be used in cases of gross personal misconduct rather than as a tool in a policy dispute.
If the President is impeached, I expect the Senate to treat the charge with the derision it deserves. Even conservative Democrats uncomfortable with the Coin strategy will come back on side, and the President’s hand will be strengthened immeasurably on acquittal. Republicans will have to learn that control of the House is not sufficient to hold the President, and the US economy and people to ransom. The conservative stranglehold on power will have been broken and the Reaganite fever lifted. If only we, in Europe, had a similar opportunity to break the back of “Austrian” economic theory and practice.
PS – Some democrats have suggested that the trillion $ coin should have President Reagan’s likeness on one side, and GW Bush’s on the other – in honor of the fact that Reagan tripled the National debt, and Dubya doubled it – in order to emphasize the origins of the debt and counteract The current GOP orthodoxy that Obama is responsible for it all. My preference is to have Iraq on one side and Afghanistan on the other, to highlight the fact that the estimated 3 to 4 Trillion cost of those wars (c. 25% of total US National Debt) were never funded and that wars have real costs in treasury as well as lives. Obama could go further and propose an Oil Company, Carbon, Tobin or gambling tax as a means of funding the Coin and eventually buying it back off the Fed and melting it down. Let those who benefit from wars pay for them.
