I support Felix’s sentiments.
If there is to be a $1 trillion coin, it should be smithed by dwarves in the deep places of the earth.
Mint the Coin
Republican leaders in Congress are once again threatening the good faith and credit of the United States by denying the President the authority to borrow money for expenses it has already ordered the President to incur.
If the government runs out of money before Congress extends the debt ceiling, the President will be in the position of performing something illegal—either the President will refuse to pay for expenses he is legally obligated to pay for, or he will be required to borrow money in defiance of the debt ceiling. Either way, the President will be forced to commit an illegal action. Not very nice of Congress to do to Mr. Obama.
Some have suggested a third way. Ed Kleinbard suggests the government distribute what are essentially IOUs. They would not have the value of currency and therefore not break the debt ceiling limit, but they would be redeemable by the government for cash at a time when Treasury is able to pay them.
But this solution is just another huge windfall to banks who will charge cash-strapped folks like Social Security recipients steep discounts to convert their IOUs into cash. It will cause a lot of pain to America’s most vulnerable.
Another idea is to mint a trillion dollar coin. The Constitution allows the President to mint these coins at any time in any denomination.
Objections flew quickly from the deficit scolds and the keepers of market wisdom—this is a fantastical idea! It will turn us into a banana republic!
Yet beyond these conclusory statements that condemn the coin idea without providing reasons for condemning it, I have not seen a persuasive, reasonable argument for why minting the coin is not a good idea.
Even critics of the coin idea do not deny that it is legal.
What about the economics? If minting the coin would lead to inflation, unemployment, or other bad outcomes, then the coin is a bad idea.
It turns out that the effect of minting the coin will be 100% identical to borrowing $1 trillion.
As Paul Krugman explains, after minting the coin, the Treasury will deposit it at the Federal Reserve where the Fed will treat it as an asset against which it can borrow. Most likely, the Fed will react to the new borrowing by selling off part of its $3 trillion balance sheet, meaning that there would be no increase in the monetary supply and therefore no inflation.
Even if the Fed did not sell off part of its balance sheet, the increased money would not be inflationary for the time being. Our economy is still depressed. We are experiencing what is called a liquidity trap. In these conditions, large increases in the monetary supply will increase output (GDP) but not inflation.
As you can see from this graph from the St. Louis Fed, the money supply has increased by over $2 trillion since 2009, Deficit scolds predicted spiking inflation, but during that time inflation has largely held below the 2% target.
So minting the coin will not increase inflation. It will also boost employment relative to the alternative of not spending money because of a debt ceiling restraint.
Will it spook the markets, leading to higher interest rates for the United States to borrow? This is a favorite argument of the deficit scolds, who have been predicting market calamity since 2009. But it has not happened, and it won’t happen until there is a change in economic fundamentals. When will the deficit scolds lose credibility?
The trillion dollar coin does not change the economic fundamentals of the United States nor the government’s solvency. Markets will react exactly as if the United States had borrowed one trillion dollars. That is to say, interest rates will remain near historic lows.
I am genuinely interested in learning a reasonable, persuasive argument against the coin. But if there is not one, then let us stop ruling our country based on prejudices and superstitions of the self-styled financial elites. Let us look at data and empirical realities.
Mint the coin.
President Bush’s America
Today, President Bush Obama signed the fiscal deal passed by Congress into law.
Professor Zellser from the Woodrow Wilson School articulates how the fiscal policy and national security apparatuses of George W. Bush have been institutionalized by Obama. We already knew Obama’s foreign policy was as aggressive as George Bush’s, but today we learned that they have almost identical views on taxes.
One illustrative exert: “As Michigan Republican Rep. Dave Camp remarked, “After more than a decade of criticizing these tax cuts, Democrats are finally joining Republicans in making them permanent.” Indeed, the Congressional Budget Office estimates that the new legislation will increase the deficit by $4 trillion over the next 10 years.”
This is hailed as fiscal responsibility.
And this is how America’s safety net might finally be undone. Not only from an assault by its opponents, but also from the willing submission of its so-called defenders.
Caver-in-Chief
Obama’s presidency has been one extended disappointment for me.
Winning the battle but losing the war. That might be another description of Obama’s entire presidency.
It becomes tiresome saying “well at least Obama is better than the alternative” after so long.
The good news is that Obama did not give Republicans senseless and cruel benefit cuts on Social Security.
The bad news is that Obama broke the central campaign pledge on which he ran. He promised that rates would rise on people making more than $250,000. Instead, Obama allowed the income threshold for rates to rise to be set at $450,000. This gives up $150 billion in revenue over the next decade.
This amount of money will not make or break the United States’ fiscal position, but it indicates that Obama will cave on anything and everything. It’s all negotiable for this man.
Obama campaigned on the tax issue. He won. In negotiations, he drew a line in the sand, citing his electoral victory, telling the Republicans that rates had to rise on people over $250,000. Obama said there was no way that he would budge. Days later, he budged.
There is going to be another fight this month over the borrowing limit for the government. If I were the Republicans, I would bet on Obama caving again on any position he says in these next negotiations. He is the caver in chief.
Go Over the Cliff
I had the option in graduate school to take a class on negotiations, but I learned how to negotiate as a kid.
My brother’s Godmother loves to tell the story when it happened.
I must have been about 3 years old. My family was relaxing after one of our typically long meals, preparing to eat dessert. That night, we were having Cincinnati’s favorite ice cream—Graeter’s.
We had chocolate and vanilla in the freezer. I wanted strawberry.
I yelled, “No, I will not eat chocolate ice cream. I want strawberry ice cream.”
My mom told me it was either chocolate or vanilla or nothing. Then I threw a fit.
My mom looked at me and spoke those dreaded words: “you’re in time out! Go to your room.” My dad tore me away from the table, kicking, screaming and crying.
Tax Ideas
Some good ideas from Leonard Burman and Joel Slemrod.
The big takeaway is that marginal rates need to rise to Clinton era levels for the top tax bracket, and that closing loopholes (mortgage interest, healthcare, charitable deductions, etc) must be done smartly.
The only one that scares me a little is his ideas on ending the healthcare deduction. Doing so would make it very difficult for middle class families to receive needed health care. Maybe under the ACA the subsidies would make this more affordable, but I’m not sure. This idea would need further vetting before getting my approval.
Voting on Faith
Voting these days is an act of faith. We take the time to go to a polling station and cast a ballot even though we know our vote won’t affect the outcome of the election. And even if it did, our political system is so broken that fundamental change often seems unlikely anyway.
We Americans have, after all, become profoundly cynical about our institutions. About 22% of us trust the financial system while 76% say the nation’s economic structure “favors a very small proportion of the rich over the rest of the country.” Confidence in the institution of the presidency hovers in the mid-30s and trust in Congress has fallen to a staggering 11% — lower than the proportion of Americans who trusted in King George during the Revolutionary War.
Unfortunately, this lack of confidence is probably justified. Journalist Chris Hayes has dubbed the last 10 years “the Fail Decade” because of just how badly the elites running American institutions have bungled their responses to crises ranging from Hurricane Katrina to the Iraq war to the meltdown on Wall Street to pedophilia in the Catholic Church to steroids in Major League Baseball. Meanwhile, the richest Americans are able to wield such outsized influence on our electoral process that ordinary citizens might be forgiven for thinking they’ve been practically reduced to spectators in a so-called democracy.
Mitt Romney to America: You’re on Your Own
Enough has been written about the empirically misleading nature of Mitt Romney’s 47% claims, so I will not repeat any of that here. Ezra Klein does a nice job of this.
Ah data. It always keeps me sane when politicians spout off philosophies, morlaities, and ideologies that they garb in the robes of ‘economics’ and ‘facts.’
The real data shows that we are not living in a society where nearly half are in the wagon that the other half is pulling. This is stupid. Why am I even writing about this?
I guess I shouldn’t be surprised by the Romney echo-chamber when we live in a country in which almost 75% of Republicans believe that our President was born in a foreign country and more than three quarters of Republicans believed that Iraq had WMDs when we invaded, according to a 2012 Dartmouth poll. Even facts are polarized in our society.
What’s more interesting than the misleading empirics—and where the real choice in the 2012 election will occur at a very fundamental level for voters—are the ethics of Mitt Romney’s economic vision.
Mitt Romney, SkyMall Model
Washington, D.C.
Here’s the thing about Mitt Romney: he looks like he should be riding a Segway in a SkyMall catalogue.
Not one misplaced hair, a confident smile even while looking ridiculous – it screams SkyMall. I mean look at the crotch line on these jeans:
You don’t think these jeans create a hyberbaric compression chamber that eliminates lovehandles and boosts virility?
You can’t picture the Romney clan cruising around Lake Winnipesaukee on these things …
Big Spender Paul Ryan and the Bush Era Deficit
I had lunch with a friend of mine the other day who told me that he agreed with Paul Ryan’s budget plan simply because we have to make the spending cuts he proposes. There is simply no alternative he told me.
Do Paul Ryan, and the current Republican party leadership, deserve the title of fiscal hawks?
Certainly, Paul Ryan put forth a budget that puts an ax to government spending, especially safety net spending on education and food security. But the whole story is more interesting.
Two things bug me about America’s public discourse today as it relates to deficits. First, advocates of reducing the deficit show a blithe disregard for the realities of the business cycle. Why insist on balancing the budget on an arbitrary deadline like a calendar year? Why completely ignore the persistent and empirically demonstrative realities of the business cycle, where tax receipts are high during boom years and low during depressed years? More to come on this issue in a future post of the Code.
Second, the subject of this piece, the conversation about the deficit never, never ever, includes a discussion about how America went from a budget surplus in the Clinton years to trillion dollar deficits in the Bush and Obama years.
I wonder, how can we craft an effective solution when we don’t ask what the problem is? How can we learn from history if we refuse to probe it for answers?
Gotta Have A Code 