Debating the Debt!
June 29, 2012 - 9:22pm ET
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Maya MacGuineas urges America to debate the debt. She even wants the presidential candidates to devote a whole presidential debate to it. But she's not interested in debating the private sector's debt and how we might reduce that, which is very, very strange, especially since middle class Americans have lost 40% of their net worth since 2007, and the private sector debt burden has been a key factor in depressing consumption and preventing the economy from fully recovering and creating full employment. However, in spite of this private debt crisis which has placed the United States more than 3.5 years into a lost decade, now, she and her cohorts at the various Peter G. Peterson Foundation-supported organizations, whether 'left,” “right,” or “center” in the Washington, DC area, are hot for everyone to debate the “national debt problem” rather than the “private debt problem.”
Well, far be it for me to turn down such a reasonable request from such a wise lady and all her friends and supporters in the Washington, DC “village” community. I will happily proceed to debate the national debt by analyzing what Maya had to say in her piece for CNN at the end of April. I'll begin by debating a question that Maya seems to have overlooked as a desirable one for debate. Specifically, “whether the national debt is really a “problem” or not, and if so, what kind of a problem is it?”
A Daunting Challenge Or Just “Shock Doctrine”
Maya starts off her article this way:
“It's not news that the national debt presents a daunting challenge. The public debt is growing faster than the economy, a trend that cannot be sustained.”
It's not news that all sorts of people are saying that the size of the national debt is a daunting challenge, but that doesn't make it one. Nor does the fact that the national debt has been growing faster than the economy, necessarily make its growth unsustainable. In fact, to claim that its growth is unsustainable, you have to assume that the growth of the debt reduces the future capacity of the government to spend. There are at least three reasons why the national debt isn't a daunting challenge, including one that denies that growing public debt reduces the US government's capacity to spend.
First, the “debt problem” can be solved in a few afternoons with some simple legislation by the Congress, if only they were willing to pass it. That alone, makes it not very “daunting.”
Second, even if Congress won't pass new legislation, it already has passed legislation that allows the Executive branch to solve the “debt problem,” by forcing the Federal Reserve to create money out of thin air and deposit that money into Executive Branch accounts at the Fed.
And third, continuing to issue debt, even at a rate faster than the economy is growing, doesn't reduce the future capacity of the government to spend. In fact, it has no effect on that capacity at all. Let's explore the first reason in more detail and then move on to the others.
Ours is a Government with a non-convertible fiat currency, a floating exchange rate, and no debt to foreigners in a currency our government can't freely create. That means our government can always pay any and all of the debt instruments it issues and the interest on them, when payments on them fall due, by simply marking up the reserve accounts of its creditors to repay its debts.
At this point, Maya or some other deficit hawk might ask, “where's it going to get the money to do that marking up? Treasury can't freely create its own reserves, or borrow from the Fed, the government agency that can create reserves “out of thin air.” Treasury can only get reserves credited to its accounts by taxing or borrowing!”
This sound like a good question and a fair one; but actually, it's neither good nor fair, because it dodges a still more basic question that she and other Petersonians like David Walker must be aware of, but don't want to talk about, because it's very inconvenient for them. That question is: since the Congress has unlimited constitutional authority to create money, and has delegated that authority to the Federal Reserve, then why doesn't it also delegate the Treasury the same authority to freely create reserves when it needs to pay bills?
Indeed, why doesn't it just pass legislation re-locating the Fed to the Treasury Department, so that 1) Treasury would have that authority, 2) the Fed would be more accountable to the people, and 3) the extra-constitutional existence of the Fed as an obviously executive function being performed outside of the Executive Branch in violation of the separation of powers clause of the Constitution, would be ended?
In other words, if the national debt is a problem; then it's only one because of money creation constraints, including the debt ceiling, that Congress has placed on the Executive Branch over and above the normal constraints of the appropriations process. So, if there is a national debt problem, it's clearly Congress's fault, and the solution to “the problem” is for Congress to legislate the constraints away, and let the Executive Branch freely meet all its debt and appropriations obligations at will, rather than to pretend that the debt is dangerous, unless we all engage in extraordinary efforts to have the government spend less, borrow less, and raise more money in taxes.
Put simply, Congress can authorize the Executive Branch to create whatever money it needs to pay all debts as they come due, and to spend future appropriations without borrowing, ensuring that the debt will eventually disappear. So, what kind of problem is it that Congress can solve by passing a simple bill in one afternoon in each house? A false problem, I think, or at least a political problem, rather than an economic or financial problem that requires “shared sacrifice” to solve.
In fact, the claim that there is a government debt crisis, is so easy to solve with Congressional action that it is very hard not to think that all the noise about its being a monumentally difficult problem to solve that requires extraordinary courage is really about delivering more “shock doctrine” to Americans. Why? So that there is an excuse to legislate their already inadequate safety net away, while more nominal wealth is delivered into the hands of the already wealthy.
After all, why else would Maya McGuineas and the think tanks she works with, go to such extraordinary lengths and expense as they have been doing to suggest a “shared sacrifice” solution to this “problem” lasting many years, when all it would really take to solve it would be some Congressional action? If they're so worried about the national debt why aren't they circulating petitions asking Congress to place the Fed within Treasury, rather than petitions telling people that the fiscal sky is falling and only a long-term deficit reduction plan will prevent an eventual fiscal collapse?
The second reason why one should doubt that the national debt is a daunting problem, is that there's a 1996 law that allows the US Mint to create proof platinum coins with arbitrary face values and deposit them in the Mint's Public Enterprise Fund (PEF) at the Fed. Since the coins are legal tender, the Fed MUST accept the deposits and credit the PEF with the face value of any coins, however large those face values are. The Treasury is then allowed to periodically “sweep” the Mint's PEF profits from "coin seigniorage" into the Treasury General Account (TGA).
For example, if the Mint created a proof platinum coin with a $60 Trillion face value and deposited it into the PEF account, the Fed would have to credit the PEF with $60 T in its account, while taking the coin and transferring it to one of its vaults, where it would sit, permanently. The Treasury could then transfer the sum of $60 T – about $3500.00 (the cost of producing a 1 oz. proof platinum coin), or nearly $60 T into the TGA. The credits in the TGA could then be used to pay down the national debt plus interest as various debt instruments come due. They could also be used to deficit spend appropriations used by Congress.
Essentially, the profits from the coin would fill the public purse (the TGA) in the form of electronic credits generated using the Fed's power to create money out of thin air. But they couldn't be spent except to repay debt obligations, unless Congress opened the purse strings by appropriating deficit spending.
In short, within a few days after minting such a coin, the Treasury would be able to begin paying down the debt subject to the limit without further taxing or borrowing, if it chose to do so. It could pay the $6.7 T or so of debt held by the Fed and other agencies within a week, and then it could continue to pay the remainder of the debt as it falls due. As of June 27th the Treasury had redeemed $4.9 Trillion in debt instruments in June of 2012. So, had it begun paying down the public debt on June 1, and also paid off its debt obligations to other agencies and the Fed as well. By this time it would have paid off 74% of the total debt subject to the limit. Only 4.1 T or 26% of the debt would have remained. So, if this is all we need to do to pay down the national debt, then I think it is no problem at all for the Treasury, and certainly not the great crisis depicted by folks like Maya MacGuineas who are calling for shared sacrifice and austerity.
So, again, I have to ask a question. Since by now, the idea that the President can cause the Mint to create very high value proof platinum coins has hit such mainstream blogs as CNN's (Jack Balkin post), Reuter's (Felix Salmon), Think Progress (Matthew Yglesias), and Naked Capitalism (a post of mine), and a number of others, how is it that Maya MacGuineas won't discuss it as a possible solution to the debt problem, and won't call on the President to solve this very, very, serious problem by minting one or more platinum coins with face values great enough to end this oh so serious crisis by paying down the national debt by 74% in 6 weeks?
The third reason why there's no debt problem follows from the first two. If either Congress or the Executive can so easily fix “the debt problem” by either re-organizing the Government, or creating platinum coins, then why would our continuing to issue debt at a faster rate than the economy is growing reduce the future capacity of the government to spend? Let's say the national debt owed to parties external to the Government grew to 91% by 2025, from its present level. Would it be any more difficult to continue to spend by creating money out of thin air, or by minting platinum coins, or even by borrowing more, if those buying our debt instruments knew that, come what may, we can always pay our debts by creating fiat money?
Somehow, I don't think so. I think Governments controlling a non-convertible fiat currency with a floating exchange rate and no debts in currencies not their own have no spending capacity limits in their fiat currency, at any particular point. It doesn't matter how much debt they've issued in the past, because neither the size of that debt, nor the size of the debt-to-GDP ratio associated with it, affects their capacity to create new fiat money. That capacity is a matter of the political survival and functioning of such a government, in the context of its constitutional authority to create money, it has nothing to do with economic or so-called “fiscal sustainability” considerations.
In brief, the United States Government (including Congress, the Executive, and the Fed) can't have any involuntary solvency problems, because it has no involuntary limits on its capacity to spend except those implicit in Congressional Appropriations. It may want to limit deficit spending in any fiscal year to prevent demand -- pull inflation. But the repayment of debt doesn't add any net financial assets to the private economy. It's just a swap of debt instruments for money; and that's not inflationary. So, there's no “daunting debt challenge” for the United States. It's all just “a deadly innocent fraud” as Warren Mosler would say. What about the “fiscal cliff,” vs. “the debt tsunami” that the austerians like to talk about?
The Fiscal Cliff vs. The Debt Tsunami
Maya MacGuineas says:
“Even more immediately, at years' end we will face a $7 trillion fiscal cliff—a series of policies will kick in, from the blunt, across the board spending cuts (or sequester) to the expiration of the tax cuts that would reduce spending and raise taxes so abruptly and mindlessly it would put us back into recession. But ignoring and waiving the policies instead would add additional trillions to the debt and set us up for a fiscal crisis.”
Since, I've just pointed out that the US has no real debt/solvency 'problem,” it's pretty clear that this choice is no dilemma at all. When the debt ceiling crisis during the lame duck comes, just mint that $60 Trillion coin, start paying off the national debt, and refuse to make any spending cuts or support any tax increases on the middle class. Since the debt's getting paid off, there's no down side to that course.
”A fiscal cliff or a mountain of debt. It will require presidential leadership to avoid either threat. While the likely approach will be to replace the slated policies with a gradual debt reduction plan that would bring the deficit down and leave the debt so that it is no longer growing faster than the economy, there are many different ways to achieve this -- all with pros and cons -- and many specifics that need to be filled in.”
None of this is necessary. The mountain of debt isn't a problem. The fiscal cliff can be safely destroyed by a Congress and President unwilling to drive the country off of it, and there's no need for a long-term deficit reduction plan to flatten that cliff. In fact, having one is a bad idea because the deficits we run need to be determined by spending programs directed toward public purpose in the context of current economic conditions.
Whether there's a deficit or not and how large it or the debt is should not be forced by fiscal policy aimed at reducing either one or both; but should be determined by policies designed to improve both the economy and the society it serves. When you can run out of money and become insolvent, then you have to make sure that debts and deficits don't impair your future capacity to spend.
But when solvency isn't an issue, all that counts is the economic and societal impacts of fiscal policies, not their impact on the abstract debt or deficit numbers. It's not that deficits don't matter. They may matter very much if they're large enough to cause demand – pull inflation. But if fiscal policies are evaluated from the viewpoint of their impact, then inflation becomes one of the possible impacts of policy, to be assessed against other outcomes as necessary in estimating and planning for a fiscal policy that will achieve public purpose.
The Debates and the Debt
”However, the tendency during campaigns, of course, is for politicians to talk about what they promise not to do, rather than own up to the tougher decisions their stewardship would require.
Instead of allowing the presidential candidates to duck and bob to avoid specifically saying how they would stem the flow of red ink, what if voters insisted that all presidential candidates directly answer the question, "how would you fix the debt?"”
If voters insisted on that, then it would be a very big distraction from real issues. As I've already said, the idea that there is a debt crisis is “a deadly innocent fraud”; and part of its deadliness is that people become preoccupied with this false fiscal, but real but minor political problem, and spend far too little time on the myriad of real economic and societal problems we face as a nation. Everyone knows the litany of these problems well enough. I needn't repeat it here. But I can't emphasize heavily enough that voters ought to insist that presidential candidates directly answer questions about how they would handle real problems, and the question “How would you fix the debt?” is not directed toward one of these.
But questions like: “How would you help to create full employment?” “How would you create a health care reform bill that covered everyone and cut total health care expenditures as a percent of GDP by 1/3?” “How would you reduce economic inequality in the United States?” “How would you expand the social safety net to implement FDR's economic bill of rights?” 'How would you rebuild the energy foundations of the United States to create an economy no longer based on fossil fuels?” “How would would you rebuild the public education system in the United States, so that we are among the top few nations in the world in educational quality?” And, of course, “How would you stop and reverse the trend towards plutocracy in the United States to save our democracy?” All of these are questions that are targeted on real problems.
So, I think that these are the kinds of questions that presidential candidates ought to debate. But, under no circumstances should they waste another moment of time debating how to meet the non-existent “debt problem.” And as for detailed deficit reduction plans and scoring candidates performance on these is concerned, forget it! It's just a waste of time, a diversion for people who'd rather play games than solve real problems.
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Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future