Fix the Debt The Progressive Way!

In the shadow of the election campaign, receiving comparatively little attention from the media is another accelerating effort to prepare the way for a “grand bargain” that will legislate a long-term deficit reduction plan embodying “shared sacrifice,” including entitlement cuts that will weigh heavily on the vulnerable including, the young, the elderly, the old, the disabled and other disadvantaged groups; and that will also further exacerbate the rapidly growing inequality problem and increase the threat to our increasingly fragile democracy.

The battle cries of the austerians supporting this effort talk a bit less about “fiscal sustainability” and “fiscal responsibility” these days and much more about “debating the debt” [1] and “fixing the debt” [2] than they did 2 years ago. Their view is well-reflected in the “Summary of Fix the Debt” [3] which opens:

“The Campaign to Fix the Debt is a non-partisan movement to put America on a better fiscal and economic path. We come together from a variety of social, economic and political perspectives, around the common belief that America’s growing federal debt threatens our future and that we must address it. The Campaign will mobilize key communities—including leaders from business, government, and policy—and people all across America who want to see elected officials step up to solve our nation’s fiscal challenges. Recognizing that the time for action is now, the Campaign will work in Washington, DC and around the country to build support for a comprehensive plan to fix our long-term debt and deficits. In our history, America has always been able to tackle its greatest challenges – we are confident we can again rise to the occasion.

“The campaign is built around the following core principles:

“-- Policymakers should acknowledge that our growing debt is a serious threat to the economic well-being and security of the United States.”

Let's stop right there! I don't think policymakers should acknowledge that our growing debt is any kind of threat at all. The level of Federal Government debt is a very different matter from the level of State Government debt, or private sector debt. These last are a very serious problem for the US economy. But Federal Government debt is no threat at all, because it in no way affects the solvency of the United States Government, or its ability to deficit spend currently or in the future, as I've explained here, [4] and in other posts.

-- It is urgent and essential that we put in place a plan to fix America’s debt. An effective plan must stabilize the debt as a share of the economy, and put it on a downward path.

Even though the Federal debt isn't a threat to the United States let's accept, for the sake of argument, the notion that we do need to fix the debt. Then we have to ask how we ought to fix it? “Fix the Debt” answers this question by outlining a number of points which all assume that the Government's financial resources are limited, and that limiting the growth of the debt in order to reduce it as a percent of GDP, will require cuts in spending programs and increases in taxes amounting to many Trillions of Dollars in reduced Government deficit spending over the next decade. The “Fix the Debt” summary mentions the Bowles-Simpson $4 Trillion in deficit spending cuts; but austerians often talk about “going big” and much higher numbers such as $7 Trillion over the next decade.

“Fix the Debt” says that the deficit reduction plan should protect the fragile economic recovery and be conducive to long-term economic growth. But it's hard to see how they can arrive at such a plan, since even assuming reductions of $4 Trillion in deficit spending over a decade one is looking at an average of $400 Billion in deficit spending reductions per year.

Keeping in mind that the $800 Billion fiscal stimulus deficit spending program was implemented over two years, $400 Billion in deficit spending reductions per year translates to subtracting what amounts to the impact of 5 stimulus bills from the economy over the next decade. How austerians expect that to protect the fragile economy, and provide for long-term economic growth isn't something they bother to explain, but I think they're calling for a mission impossible for the US economy. They have no serious detailed and credible explanations of how continued growth will be possible with private debt at such historically high levels, State governments contributing nothing but fiscal drag to the economy, and the Federal Government also retrenching by an average of $400 Billion per year in deficit spending.

At this point, I could talk about the empirical evidence from the Eurozone and the UK, showing that Government cuts in deficit spending are producing nothing but misery in nation after nation; but I hope this passing reference to what we all see in the headlines is enough to remind readers that the austerians behind “Fix the Debt” are either not living in the real world, or are deliberately misleading the public about having a deficit reduction plan that will both reduce the debt-to-GDP ratio, and also protect the economy from a crash now, while being conducive to growth in the future, and “leaving our grandchildren better off.”

In any event, I'm glad that the goal of Fix the Debt is the compound one of both reducing deficits and protecting and growing the economy; because I'm willing to accept that compound goal as a basis for debating what to do about the debt; and I think I have a plan for not just reducing the Federal Government debt, but also for paying it off and removing the need to issue debt again. My plan will not hurt recovery efforts or harm long-term growth. In fact, it's consistent with much heavier Government “deficit” spending to enable a much stronger recovery than we have now and much more rapid growth as well.

The Plan

I've been at pains to point out in many, many posts in the past, for example, here, [5] here, [1] and here, [4] that there is no solvency problem for a Government like the US with a non-convertible fiat currency, a floating exchange rate, and no debts payable in currencies it doesn't issue, because such Governments can always issue the money they need to pay any obligations, or to buy anything for sale in their own domestic economy. Here's how the Executive branch could use its legal power to coin money to end the deficit/debt problem in a way that would not tank the economy now, or interfere with its future growth.

First, the President should use the authority provided by a 1996 law [6] to mint a $60 Trillion coin and deposit it at the Federal Reserve. The deposit will eventually result in nearly $60 Trillion in Proof Platinum Coin Seigniorage (PPCS) profits being credited to the Treasury General Account (TGA).

Second, the Treasury should use that money to pay off all the intragovernmental and Federal Reserve-held portion of the current $15.9 Trillion debt subject to the limit. That portion is roughly $6.7 Trillion, or about 42% of the 15.9 Trillion. That action would immediately reduce the debt-to-GDP ratio to 58% of GDP or so.

Third, 10% or so of the remaining debt is short-term debt with a term of one-year or less. The Treasury should pay that off as it comes due. So within one year the Treasury will have paid off 52% of the debt. However, another $5.9 Trillion will come due over a ten year period. So by 2022, assuming robust GDP growth the debt-to-GDP ratio would be less than 5%, composed of debt with a maturity of up to 30 years from 2012, assuming that the Fed doesn't buy up long-term debt and let the Treasury buy the debt back back early. Eventually, after 30 years the debt subject to the limit would fall to zero.

Fourth, the above assumes that Treasury would issue no new debt instruments, but would pay for all future deficit spending appropriated by Congress with coin seigniorage profits.

That's it! The debt is “fixed” without tanking the economy; either now or in the future.

What About Inflation?

You know the first thing the austerians will whine about when people start pushing this PPCS stuff is “what about inflation?”

Well, we know that the first $6.7 Trillion of pay-off isn't going to cause inflation because about $1.9 T is going to the Fed and will just sit there until they decide to do QE or something. But they can do the same QE or not whether they have these reserves or not, because they can always create new reserves out of this air anyway. So, transferring reserves to them can have inflationary impact. The remaining 4.8 T of the $6.7 T just goes into Government accounts and isn't spent until needed anyway, so it won't cause any additional inflation.

Next, the $1.6 T in Treasury Bills that would be paid off the first year basically come under the heading of QE done by the Treasury, since it's a swap of the T-bills for reserves. We know from the Fed's experience, however, that QE over a year's time of that volume has little inflationary impact in an economy like the one we have now. The reason is that even though it adds reserves to the banking system, it adds very little to the net financial assets of the T-bill holders, which is also why the impact of the Fed's QE on recovery has been so miniscule.

Now, how about the $5.8 T in debt that would be paid back over a 10 year period? The volume paid back each year would still amount to relatively small amounts of QE and would still add very little to net financial assets (only interest payments); so there's no reason to believe this would be inflationary either. The final $1.2 T in bond debt would be gradually paid over a 20 year period and would hardly create a ripple in the money supply of our much expanded economy, so here too using coin seigniorage rather than debt to enable deficit spending make no inflationary impact.

So, finally, we come to the possible inflationary impact of using coin seigniorage profits for deficit spending. Here we do have the Treasury adding real financial assets to the economy in the form of bank reserves. And this can be inflationary if deficit spending exceeds the productive capacity of our economy. However, I want to emphasize very strongly that there's no reason to believe that deficit spending accompanied by debt issuance is any less inflationary than is deficit spending using coin seigniorage profits. To believe that it is you have to believe that reserves are more inflationary than Treasuries. But the theory supporting that view, the quantity theory of money, was shown to be false by Keynes in the 1930s, and, the empirical evidence available since [7] suggests, if anything, that Treasuries are more inflationary than reserves since they pay higher interest rates.

So, there's nothing to the inflation argument the austerians are likely to make against PPCS, and the way is clear for progressives to use it in the coming debate over how to fix the debt.

The Progressives and the Plan

The austerians aren't the only ones mobilizing for an upcoming political fight over deficit reduction plans. Progressive organizations are also gearing up for a serious fight over competing plans. Here's Brian Sonenstein at FireDogLake from a Post [8] announcing an FDL webinar to inform people about the accelerating effort to cut entitlements:

“The deficit scolds have set up a seemingly never-ending system of triggers and deadlines to force ‘solutions’ to Social Security, Medicare and Medicaid budgets that would reduce benefits and do irrevocable harm to these critical programs. From the debt ceiling debacle to the upcoming fiscal cliff, our country has been led into a vicious cycle of fear mongering and misinformation on the deficit that only becomes more entrenched with time.

“Now that secret committee meetings have failed twice to impose unpopular austerity programs on the public, corporate heavyweights and their friends on Capitol Hill are forming groups like Fix the Debt, raising millions of dollars to lobby Congress into passing harmful reforms that throw society’s most vulnerable under the bus in the name of so-called ‘fiscal responsibility.’

“By making our voices heard once more in opposition to benefit cuts, we can continue to fight back attempts to destroy some of the most successful programs in our country’s history.”

The problem with the progressive position in statements like the above is that 1) it doesn't actually deny that there is a deficit/problem and 2) it doesn't really say how the progressive groups would solve the problem whose existence they're tacitly acknowledging. Instead, progressives rely on arguments against austerity emphasizing its negative economic impacts, fairness concerns, obligations to the vulnerable, and claims that the rich can afford and should be willing to experience increased taxation since this country has given them so much.

Those arguments are good ones; but they are mainly defensive ones aimed at conserving a social safety net under attack. How much more compelling would the progressive case be, if it both used those arguments and proposed a plan to fix the debt which required no austerity, but even provided plenty of scope for deficit spending investing in economic recovery, an expanded safety net, full employment, enhanced Medicare for All, and “green” economic growth?

Well, the plan I've outlined here is just such a plan. I urge progressive writers and organizations to pick up on it and urge this Administration to mint that $60 T coin, shut down all the deficit terrorist organizations, along with their sanctimonious holier than thou propaganda, and, most importantly, shift the debate to discussion of the real issues this nation faces. These issues are difficult enough to deal with, even when we are free of the false issue of measuring all Federal spending and tax policy against the standard of whether it is deficit neutral or deficit reducing over some arbitrary time period, according to nonsense long-term CBO, OMB, or private economic projections over that period.

(Cross-posted from Correntewire.com [9].)