Contemplating the likelihood that Hillary Clinton will win the presidential election, and may well carry in with her a Democratic House and Senate Paul Krugman considers what he ought to do to improve the economy. He says:
There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.
How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing.
Let me walk through this case, then address some of the usual objections.
Then Paul Krugman takes us through brief examples of pressing needs for public investment in Washington, DC, and Florida, and says there are similar stories all over America, so that infrastructure investments would surely increase our real wealth. He then points to the fact that the federal government can borrow at extremely low interest rates on both 10-year and even 30-year bonds. He then argues:
Put these two facts together — big needs for public investment, and very low interest rates — and it suggests not just that we should be borrowing to invest, but that this investment might well pay for itself even in purely fiscal terms. How so? Spending more now would mean a bigger economy later, which would mean more tax revenue. This additional revenue would probably be larger than any rise in future interest payments.
And this analysis doesn’t even take into account the potential role of public investment in job creation: Despite a low headline unemployment rate, the U.S. economy is still probably short of full employment, and an investment agenda would also offer valuable insurance against possible future downturns.
Compelling argument, right? Only if one assumes that the only way the government can invest is by first borrowing the money to spend.
But, If the government can always spend on investments by creating reserves without issuing bonds, then the fact that interest on government debt instruments is very low right now is irrelevant to its ability to invest. And, Krugman does know that issuing bonds isn’t necessary if the government wants to add reserves to its spending accounts at the Federal Reserve for a particular purpose. We know that because he has previously advocated for using platinum coin seigniorage to create reserves.
In fact, Krugman first noticed and publicly acknowledged the platinum coin option for generating reserves in Treasury accounts at the Fed and getting around debt ceiling crises during the summer of 2011 when Jack Balkin discussed it. When the next debt ceiling crisis occurred during January of 2013, he advocated for using the Trillion Dollar coin, calling it “silly” but viewing its use to get around the debt ceiling as justified by the silliness of Republican use of the debt limit to avoid paying government bills already incurred, and by the duty of the government to avoid default.
Krugman understood then that the government could deficit spend without issuing debt even under current law, but he also thought, or at least contended, that if the government did do that it would later need to “sterilize” its use of the Trillion Dollar coin by issuing and selling $One Trillion in bonds, and then using the reserve credits from the sale to buy back the Trillion Dollar Coin from the Fed, and then melt it down to destroy it.
Of course, the law authorizing Treasury to have the Mint create such a coin and deposit it at the Federal Reserve doesn’t require the government to buy it back from the Fed at some later time. So, the requirement for “sterilization” of high value platinum coins doesn’t exist.
Krugman, however, evidently believes that sterilization ought to be done to minimize the danger of inflation (Weimar! Zimbabwe!), resulting from Treasury filling its purse by forcing the Fed to issue reserves to Treasury it can then use to spend appropriations. So, perhaps Krugman, and others who have echoed his view, believe that since he thinks it ought to be a requirement of the law then surely it is that.
The potential danger of inflation resulting from using the platinum coin option certainly merits discussion, which I’ve provided elsewhere. But, as I’ve argued there, the danger of inflation by generating reserves from issuing platinum coins is no greater than the danger of inflation by generating reserves from issuing and selling Treasury interest-bearing bonds. So, it is hard to see why borrowing existing money from the non-government sector of the economy is a better option than using platinum coins, or even having Congress grant Treasury authority to mark up its own accounts at the Fed in order to spend Congressional appropriations.
If we did stop issuing interest-bearing debt and used reserves generated from platinum coins instead, then the political issue of whether borrowing is desirable would not arise at all. Nor would the political issue of whether “the debt” is “too much” at $19 trillion.
In fact, using platinum coins would avoid the Treasury having to make interest payments on the debt, and also would result in the Treasury gradually liquidating the $19 trillion in debt as it falls due. We would not then have to listen to the national debt mongers led by Peter G. Peterson any longer, and, of course, we would no longer have debt ceiling crises to worry about and to provide distractions for Congress to give it an excuse for not doing anything to meet our real needs.
Krugman says that what matters is not the overall level of the debt, but the comparison between the cost of servicing it and our ability to pay. And he points out that right now “. . . federal interest payments are only 1.3 percent of GDP, low by historical standards.”
But, if platinum coins were used to produce reserves needed for spending appropriations, then the Treasury would, in effect, be generating necessary reserves, at its discretion, to spend, and there would no longer be an issue about ability to pay interest because there would be no interest to pay. Putting the issue in terms of Krugman’s measure of ability to pay; interest payments of 0.0 percent of GDP, are even lower than interest payments of 1.3%.
Nor would the issues of long-term interest rates, or inflation-protected bonds, or rising costs of borrowing arise in the platinum coin scenario. All these worries of Krugman and Washington DC’s finest just go away if the Treasury is able to get its own reserves issued by using platinum coins rather than issuing bonds.
Krugman also considers other objections to borrowing and investment spending. The first is the view that the government can’t do anything right. He is right in pointing out that history gives the lie to this bit of neoliberal dogma.
And he dismisses specific examples of failures like Solyndra by pointing out that all large organizations including private sector ones have their project failures. And then he goes on to point out that the solar and wind projects promoted by the Obama Administration have “. . . been a huge success, with a rough quadrupling of production since 2008. Green energy should be seen as an inspiration, not a cautionary tale.” He concludes by saying that there is “. . . an overwhelming policy case for federal borrowing to pay for public investment.”
Krugman is right about the federal government paying for public investment, but not about the overwhelming policy case for federal borrowing to make this happen. This is, first, because the relative effectiveness of federal investment spending would not be affected by the method used to fill the Treasury’s purse. Whether the spending is facilitated by borrowing or by platinum coin seigniorage makes no difference to the success of projects.
And second, it is because using the seniorage method would end the influence of debt mongers who are always claiming faux funding crises are besetting various parts of the government, such as Social Security and Medicare that they would like to privatize or eliminate.
Of course, there are a host of objections to using platinum coin seigniorage. And I haven’t discussed them in this post. An extensive list of them is provided in my 2013 – 2014 e- book which covers inflation risks, legal, political, economic, and institutional objections to using platinum coin seigniorage to facilitate Treasury spending. Interested readers can review the objections and my rebuttals to them in the book.
Assuming that none of the objections, including the claims of likely inflation, are valid, Krugman’s “Time to Borrow” becomes “Time to Spend on Public Investments” without worrying about how we can pay for it. We simply can. It’s in the Constitution and it’s in the law authorizing platinum coin seigniorage.
And it means that the time to spend on public investments is whenever the government needs to do that, and Congress appropriates the spending. It also means that it is not the current low interest rates on federal bonds that makes this a particularly opportune time to invest, but only the government’s ability to pay which for a monetary sovereign nation such as the United States is always unlimited. Since that ability to pay never changes, there is never a time that is more opportune than any other for public investment, provided only that the real resources are available in our economic system.