Avoiding A Debt Ceiling Election Sellout!

During the past few months the results of polling suggest that Barack Obama will be re-elected. But they also show that his support is shallow and could be shaken easily by an economic downturn during the next 6 months.

A few more months of very small or negative job growth, a rise in the unemployment rate to 9%, a blizzard of super-Pac propaganda, a lot of schmoozing by Ann Romney, some press coverage of the Obama Administration's coddling of the mortgage fraudsters, the usual distractions from the most serious issues facing the United States, and who knows? People may well decide that they can overlook the robotics, the Mormonism, and the blatant lying of "the Mittster," and take a chance that he can get them those jobs, even at at the price of scaling back their social safety net including their access to health care for the sake of providing a few more hundreds of thousands or millions of bucks per year to his good ball club and race car-owning cronies.

But, what are the chances that there will be that economic downturn that will suddenly result in a new ball game for our ever-hopeful and persistent corporate acquisitions star pander-bear? Well they've gotten a little better lately, I think.

Straws in the Wind

First, the BLS reports [1] that only 120,000 full time jobs were gained in March, perhaps 100,000 less than anticipated. The news is also worse than that, if you look carefully [2] at the numbers.

Second, Federal Government spending this year is down $433 Billion [3] compared to last year at this time. That's about a 3% of GDP drop, discounting any fiscal multipliers that might have been generated by spending at the same level as last year, and is about half the amount of spending appropriated in the ARRA fiscal stimulus bill of 2009.

Third, Federal Government tax revenues are running $45 Billion ahead [4] of least year. Adding that amount to the $433 Billion in spending reductions, the Federal Government's net spending input into the non-Government sector is nearly $500 Billion less than it was at this time a year ago.

Now that is fiscal drag. It is going to be reflected in economic growth; and it is going to be reflected in declining levels of employment growth, and perhaps in a growing unemployment rate or faux shrinkage of the work force, caused by BLS definitions of the labor force defining people out of it.

Fourth, now, into this mess comes the expectation that the debt ceiling may once again be reached by this Fall, just before the election. The Administration won't want a debt ceiling fight disturbing its re-election campaign and giving Romney the chance to charge the President with fiscal irresponsibility.

The President's campaign may well be able to manage that charge and turn it around on the Republicans. But the fight would be messy and risky, and if the President is ahead in the polls at the time it might well provide an opportunity for Romney to get level with him.

This President doesn't seem like much of a risk taker to me. Others may disagree with that. But I think he likes to avoid uncertainty if he can, and that he will work hard to avoid a fight with the House Republicans until after the election.

In addition, as the debt ceiling approaches, the Administration may try to ensure that there is no messy fight over it by cutting back on Federal deficit spending to avoid reaching the debt ceiling before the election. In fact, it may have already started to cut back, which may be the explanation for Federal spending already lagging behind its pace of a year ago.

If this analysis is right, then we can expect Federal spending to lag behind last year over the coming months as well, with the results showing up in lower GDP and employment numbers. The Administration will probably play a game where it tries to balance Federal spending against economic results in such a way that after some time of letting the economy live with fiscal drag, it spends very fast to get it to build a head of steam in the last four months before the election, with a peak coming in September, but without breaching the debt ceiling. It may then try to make sure that the BLS results for October are available only after November 6th, at least if they don't continue the downward unemployment trend planned for the four months just before October.

But what if games like this don't work well for the Administration, what if it can't balance things well enough, and spends too slowly to show that the economy is "moving in the right direction" near election day? Or what if it spends too fast and hits the debt ceiling on October 15th and there is a confrontation in the final weeks of the campaign?
The likely game the Administration will play may be successful in persuading the public that unemployment is improving, but it is, clearly, another risky course, which the President and his Party will want to avoid if they can. So, what will they do?

Alternatives

1) Well, maybe they won't do anything that's proactive. Maybe the President will just play the game I outlined above, and just cope with the mess if he hits the debt ceiling. This would be stupid, I think, and especially so for his Party, since many Democratic incumbents may suffer if Washington is in a mess at election time. Many Republican incumbents may suffer too, but this won't make things better for the losing Democratic incumbents.

The President may not care about losses Democrats would suffer in 2012, if he still wins, because that might make it easier for him to give in to extreme Republican demands shredding the social safety net. He's talked often enough about the need to bring entitlements under control, and recently a number of stories have confirmed that heavy cuts in the safety net were placed on the table in previous negotiations with Republicans over the debt ceiling and the budget.

Still, manipulations of this kind are tricky, and he may not want to risk making the Republicans too powerful by adding to their seats in Congress and losing control of the political situation. After all, if they do get too powerful, it's not beyond the tea party to seek impeachment and make him a dead letter in his second term. That wouldn't be good for his "legacy," I'm afraid.

2) The President could use the 14th Amendment defense to breach the debt ceiling. I've outlined this possibility here [5]. But it's another risky, messy move, especially with elections coming soon, which would again risk his re-election and Democratic seats in Congress.

3) A third class of options is something I've written extensively about. It's the option of using Proof Platinum Coin Seigniorage (PPCS) [6] (the method of getting around the debt ceiling originally suggested by Beowulf [7] some time ago). There are any number of PPCS options the President can use to get around the debt ceiling by generating coin seigniorage profits. I've outlined some of them here. [8] Some of them stop with $1/2 Trillion coins, some go over $1 Trillion up to $5 Trillion, and still others envision very high face value coins ranging up to $60 Trillion and up.

For getting around the debt ceiling, coins with face-values up to $5 Trillion will certainly remove the need to issue further debt subject to the limit and break the ceiling. However, minting a platinum coin with a face-value of say, $60 Trillion is also a political game-changer [9], because it results in filling the Treasury General Account with enough in credits to make it obvious to the most concrete thinker that the Government has the capacity to pay all the debt subject to the limit, issue no more such debt if it so chooses, and also spend whatever Congress chooses to appropriate in the way of new programs to solve current problems.

So, issuing a $60T coin, removes the issue (excuse) of whether the Government of the United States can afford to pay for employment programs, educational programs, infrastructure, new energy foundations, a Medicare for All program, new R & D programs, or expansion of the social safety net from the political table. Issuing that coin can and would create a new political climate moving American politics much further to the left within the space of a few months. It is what the President ought to do. It is what he would do, if he were really committed to the well-being of most Americans. But since his behavior in his first term [10] indicates that he is not, I don't expect him to exercise this option.

On the other hand, more modest PPCS options such as minting a $1 Trillion coin would get the President past any debt ceiling crisis in the period approaching the election. There'd be some squawking by the Republicans, alright, if he used a PPCS option to get by the debt ceiling. But his action would be entirely legal, and the public would be happy that he found a way to avoid another threatened hostage-taking by the Republicans. Using an option like this could well clinch a close election for him.

4) Beowulf, the blogger/commenter, who first proposed using high face-value PPCS to get by the debt ceiling, just came up with a new option [11] to avoid breaking the debt ceiling. That option follows:

"Another way to sidestep the debt ceiling is to go the opposite extreme from one-day maturities, issue perpetual T-bonds with no maturity date (what the Brits call consols). Look at the debt ceiling law, the public debt adds up, for all outstanding debt, the face amount of the guaranteed principal. The future interest payments to be paid aren't counted. ("The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government").
http://www.law.cornell.edu/uscode/text/3 [12]...

"If there's no maturity date, then there's no promise to repay principal and thus there's nothing to add to the public debt total. Tsy could issue an unlimited amount of consols without tripping over the debt ceiling."

Beowulf has more on consols here. [13]

So, the Treasury could also legally issue consols in amounts substantial enough to avoid breaching the debt ceiling before the election, and also to avoid the threat of a Government shutdown with its accompanying political fallout. My hunch is that the President will probably either just play the balancing game, or at most issue consols to put off a day of reckoning.

I don't think he'll either use the 14th amendment challenge or any of the PPCS options, because he will view them all as too disruptive to the status quo of financial sector control over the economic and political systems, especially the PPCS options which rip the mask off his oft- stated but false view that the Federal Government can only raise revenue by either taxing or borrowing.

Using consols also reveals that the "either taxing or borrowing" meme is wrong. But the idea of consols is more resistant to easy widespread public understanding than the idea of a Trillion dollar platinum coin. And it also still looks like it's about borrowing, so it doesn't flatly contradict the "taxing or borrowing" myth. So, of course, given the President's evident dislike for dispelling right-wing myths, if push comes to shove, this is likely to be the Administration's preferred tactic.

What About A Post-Election Sellout?

Between PPCS or consols, I think the President will be able to avoid a debt ceiling crisis before the election. If he avails himself of one of those alternatives sooner rather than later, he won't even have to play the game of trying to ration spending Congressional Appropriations to avoid getting to the debt ceiling before October or November. This means he can end the fiscal drag on the economy we're seeing from lagging Federal spending, and probably win the election easily. However, after the election what will happen?

Will the President admit that his ability to avoid the debt ceiling through using PPCS or consols illustrates (and depending on what exactly he does), even demonstrates, that the Government can never run out of money unless Congress and/or the Executive wants it to; or will he go on with the charade of telling people that the Federal Government's capability to acquire financial resources is limited to taxing and/or borrowing and move on from there to insist that a deal must be struck with the Republicans to sharply cut Federal spending including funds for the social safety net in in order to reach his mythical goal of fiscal sustainability? One guess!

Our elections for Federal office have, for many years now, exhibited a failure of democracy. Officeholders, including the President, are elected by persuading the public that they will seek certain changes and support certain values. But for the most part, they behave very differently once they take office. There is a big problem of day-to-day accountability. The lobbyists work 24/7 to get what they want, and they persist in working the system day after day and week after week. They are professionals at getting what their clients want.

But for working people, politics is a passing occasional interest. They don't have the time or resources to track the influence relations between corporations and other interests on the one hand, and the public, on the other hand. Nor do they have the resources to constantly register their opposition to pending or newly introduced bills written by the lobbyists to reward their clients at the expense of the public interest.

How many bills have now been introduced to restrict the interchange of content over the internet to protect the intellectual property rights of large companies? One bill, like SOPA, for example is defeated, and the very next week another bill is introduced, that has to be fought. Bill after bill is introduced that violates privacy rights in the name of national security. If one is defeated or amended, then another bill suddenly appears that may well be worse, but that carries great benefits for the military-industrial complex or other clusters of big business.

One initiative is formulated to support cuts in the social safety net. It falls flat, like the Catfood Commission did, and suddenly an initiative that is even worse is brought up again by a political party that claims it is dedicated to the social safety net. A bill is formulated whose purpose is supposedly to provide universal health care to Americans, but before that bill gets through the Congressional gauntlet it becomes primarily a bailout for the insurance companies and even if it works as advertised, will still leave more than 20 million people uncovered by health insurance in 2019, nearly ten years after it was passed.

A credit card reform bill passes, but it allows 9 months for the credit card companies to raise interest rates on consumers before the bill becomes effective, which they all do, so that passage of the bill actually hurts most credit card users and pads bank profits at their expense. And even apart from that, the so-called reform contains no maximum credit card interest rates to prevent the companies from charging what used to be recognized as usurious interest rates. A Finreg bill is passed with great fanfare and almost no effect on the financial sector more than 1.5 years after its passage.

Very little of this was anticipated by those who so enthusiastically elected Barack Obama. He simply has not done the things he was elected to do, and in many cases he has done the opposite of what he said he would do. Nor did the Democrats elected along with him. Nor did the Republicans elected in 2010.

In most states, the pattern is the same. People are elected to do certain things, and then they do things that are completely different and that only small minorities of the electorate want to have done.

Barack Obama will not be re-elected if he runs on a platform of cutting social safety net programs in the service of creating long-term "fiscal sustainability." That goal of his will not be front-and-center in this campaign. His wish to "save the safety net" will be trumpeted.

Yet the chances are very good that after the election, and regardless of the condition of the economy, that he will use the lame duck session to put through a deficit reduction program that does much to shred the safety net in the name of a fiscal sustainability goal, that if he has used consols or PPCS, will have already been shown to be a moral fantasy whose implementation will make people suffer for no good reason at all. If America were really a democracy, this kind of open flouting of the public will would not be possible, and the politician who attempted such actions would have to resign immediately over the public uproar.

But that is just not America today. We are not a democracy, we are a kleptocracy, a kleptocratic oligarchy, in which the rule of law has failed [14], and a President who works against the public will, as measured by numerous issue polls, for his whole term, can nevertheless run a populist campaign for re-election, based on fairness, and be re-elected because his primary opponent is likely to be even less concerned about fairness and justice than he is.

So yes, President Obama has the means to short-circuit a debt ceiling crisis at election time, and should be able to get re-elected easily. But before anyone celebrates this likely result, they need to ask the age-old question "Quo Vadis?" Because even if we re-elect him, we evidently have no way of making him accountable and preventing him from doing things that are the opposite of what we want. Kleptocracy is here, now, and the history of Barack Obama's first term suggests that we can do nothing to stop him from nurturing and consolidating it during his second.

(Cross-posted from Correntewire.com)