Debt ceiling crisis politics has now provided us a temporary respite by getting a Continuing Resolution passed that will re-open the government until the next deadline for broader agreement on February 8th. There has been no resolution of the underlying political problem however, and so the likelihood of another government shutdown, and still more damage to the economy as a further consequence at that time, is substantial.
So, now, while our attention is on the chaos and consequences of debt ceiling crises, is a good time to consider how we might eliminate them entirely. Here’s a rundown on the four most important methods one can use.
Repealing the Debt Limit Legislation
The first is simple. Just repeal the debt ceiling law. The reason it was passed in 1917, to grant the Executive greater spending flexibility while still limiting war spending, is now gone. Also, the President is limited in spending to Congressional appropriations and repaying debt instrument obligations of the United States.
So, the only rationale for retaining it is for one political party or the other to use it as a bargaining chip to get what it wants, which is most often something that hurts many Americans. How long will it take to repeal?
It will probably take an afternoon. No more. So why don’t the Republicans, who have control of both Houses and the Presidency, just do it and go ahead with the things they want to do?
Because both parties like, periodically, to cry poverty and to pretend that the government is running out of money. Debt ceiling crises give them an opportunity to posture about the deficit and the debt and then pivot to austerity policies that will please their donors.
High Value Platinum Coin Seigniorage
According to the US Mint:
FY 2016 United States Mint estimated total revenues are $3,839,982,000, total expenses are $3,595,307,000, of which $30,468,000 are for capital investments, and net results are $244,675,000 in earnings.
The Mint’s earnings, that $244,675,000, also known as the “coin seigniorage”, or simply “seigniorage”, is the net profit from coining money and selling it to banks and private individuals, the difference between the cumulative face values of the coins it ships and the expenses it incurs in producing and shipping coins to their buyers, including operating, materiel, and capital expenses of the Mint during 2016. Both the face values and the seigniorage accumulate in the Mint’s Public Enterprise Fund (PEF) account throughout the year.
The Treasury can “sweep” the PEF for the seigniorage into its own spending account at will. So, that is a way for the Treasury to get the Fed to markup Treasury’s spending account for reserves.
Compared to the credits to its spending account coming from other accounts holding revenue from taxing and selling bonds, the amount of coin seigniorage coming from the Mint is small. But it is there and demonstrates that there is another way the Treasury gets it spending account filled so it can spend Congressional appropriations funding its spending. And, as it turns out, that way of Treasury filling its spending account can be used to much greater effect than in the past.
By using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars, Treasury, through the Mint, can cause the Fed to fill the PEF with enough reserves to allow it to use the resulting seigniorage to perform its already Congressionally mandated spending, and even enough to pay off its existing debt.
This idea, originating with beowulf (attorney Carlos Mucha) in its Trillion Dollar Coin (TDC) form has gotten a lot of attention during the debt ceiling crises of 2011, and 2012 – 2013. But a variation of it in its High Value Platinum Coin Seigniorage (HVPCS) form, requiring a coin with face value of $100 Trillion, for example, has received much less attention.
The differences in the TDC and HVPCS variations in their political implications are great. The TDC looks like a temporary expedient to get around debt ceiling problems, whose use can be repeated when needed. But, it doesn’t quickly remove the political problem of “the national debt” from consciousness as one of our most serious political problems.
On the other hand, minting a $100 T coin would change the background of politics by providing for relatively rapid payoff of the debt subject to the limit without balanced budget-creating recessions. If such a coin were used then there would be no more austerity talk, and no questions about “How you gonna pay for it?”, since one can always answer “Well once Congress funds it then Treasury can get reserves in its spending account from the Fed through transferring existing reserves in other accounts including its PEF account previously filled with HVPCS.”
That is, the Treasury orders the Federal Reserve to increase the balance in its spending account by ordering the Mint to issue platinum coin(s) when it wants to fill it and ship the coin(s) to the Federal Reserve for deposit. The coin(s) then serve as a message, an order from Treasury to fill up the Mint’s PEF account. Once that’s done, Treasury can then send an order to the Fed to debit (mark down) the PEF account for the value of the seigniorage and credit (mark up) the Treasury’s spending account in that amount.
*I’ve discussed HVPCS at length in my book, in many posts at New Economic Perspectives, and on my current blog, covering the subject comprehensively. So, if you’re interested in more detailed information on HVPCS, then these are the places to go.
Overt Congressional Financing
This clause is needed in every appropriations bill:
Upon passage of this appropriations bill, the Federal Reserve is directed to fill the Treasury’s spending account at the New York Federal Reserve with the addition to its Reserve Balance necessary to spend this appropriation. In addition, the Federal Reserve is directed to fill the Treasury spending account with the additions to the Treasury Reserve balances necessary to repay all outstanding debt instruments including principal and interest as they fall due for the fiscal year of this appropriation.
The first sentence ensures that in the event there is deficit spending in an appropriations bill, reserves will already exist in the Treasury spending account to allow Treasury to perform its mandated spending without further borrowing. So, from the point the language is included in federal legislation, further Treasury borrowing to “pay for” deficit spending will cease to exist.
The second sentence ensures that reserves will already exist in the Treasury spending account to repay principal and interest on outstanding debt instruments as they fall due throughout the fiscal year of the appropriation. So, from the point the language is passed, the Treasury debt will be in continuous decline until, after 30 years, it will be gone entirely.
Let us call incorporation of this language in appropriations and CR bills, Overt Congressional Financing (OCF) of fiscal policy and associated deficit spending. And what we have now, we can call, in contrast, implicit Congressional Financing (ICF). OCF is better than ICF in that it is much more transparent and, almost immediately, will be much more popular with most people than ICF and its load of public debt instruments.
Within 6 months of passage of the legislation providing for OCF, its effects will be visible enough for the public to see that “teh debt” is a dead political issue, killed by the legislation. And for the more reflective among them, to learn the lesson that the debt was never a bonafide financial issue, but always a political one caused by the failure of people to understand the fiscal power of a monetarily sovereign government to repay its own debt instruments as they fall due.
At that point, and even before that for many people, we will see the end of austerity politics, periodic debt ceiling crises, fiscal cliffs, sequesters, and budget crises. OCF directly ends debt ceiling crises, because the debt is no longer relevant except as a constantly shrinking obligation that will be paid off as it falls due.
As for fiscal cliffs, sequesters, and budget crises, their justification is primarily in the false claim that the US is running out of money, and must slow the growth of the national debt enough to allow the debt-to-GDP ratio to shrink, so that we can’t afford to implement the deficit spending that may be necessary to create full employment, pass Medicare for All, and do other things that a majority of the population supports heavily, but does not insist upon in the face of supposed budget problems. There would be no fiscal cliffs, sequesters, or budget crises, without the claim that there is a Government Budget Constraint (GBC).
Once we dispel that claim with OCF, these things will be gone with the wind, and a new set of hopefully more fruitful problems will emerge. I look forward to these new problems, the real problems posed by the need to win debates with conservatives about the likely real effects of fiscal policy for public purpose, rather than the faux problems of imaginary fiscal constraints giving rise to neoliberal austerity. They will be a great step forward for American Democracy!
Making the Fed an Agency within the Treasury Department
When Congress created the Federal Reserve in 1913, progressives and many others believed, that the Fed could be staffed by technocrats who would be unbiased and who could be trusted to perform the vital functions of the Fed in a way that was fair and even-handed. But over the years, faith in technocrats has vastly eroded and the legitimacy of the Fed has been undermined, in part because its “independence” from Wall Street interests is seen by many as a myth.
The great crash of 2008 and its aftermath have heightened suspicions about who the Fed actually works for. They have strengthened the conviction that it works for Wall Street alone and never for Main Street. After all, where was the $30 Trillion plus worth of credit facilities for mortgage holders on Main Street that the Fed supplied to Wall Street and the big banks to bail them out?
In addition, the feeling is spreading among the American people that the established institutions are corrupt and that what is lacking is much more bottom-up democracy and much less trust in these institutions and their officials to fix them. So, in this, a time of coming progressive revolution, it is time to consider once again whether the US needs an “independent” Central Bank run by technocrats and accountable only to Congress, or a Central Bank under the President which would be accountable to the people through the President’s accountability, as well as accountable through Congress?
And raising that question leads to another even older one. Did the Congress in creating the Fed exceed its constitutional authority? The Constitution provides for only three branches of government and for only one supreme Executive for the American people. But there is the Fed with its Board of Governors, and its Chairperson, clearly an executive agency of the Federal government supposedly serving the people and the public purpose, but “independent” of the authority of the United States. On the face of it, that arrangement is unconstitutional, and should be ended through Congress reorganizing the Fed under the Treasury and nationalizing the regional banks.
Which of these “permanent cures” should progressives push for at this juncture of history? Repealing the debt limit law seems like the easiest fix from a purely political point of view, and it would end debt ceiling crises. But, it would not remove debt terrorism from the political sphere.
The debt terrorists would still be using the size of the debt to oppose progressive fiscal policy. And they would probably still be successful at imposing deficit reduction as the aim of fiscal policy.
Removing the debt limit removes one rationale for government shutdowns. But, there is still another available – failure of the two parties to agree on a budget, because they both agree on deficit reduction, but not on the mix of tax cuts and spending. And worst of all, the background of rising debt will continue to fuel the austerity politics that has been most responsible for the decline of democracy in America.
The second solution, using High Value Platinum Coin Seigniorage, would remove debt ceiling crises, and eventually the debt itself from the political table, freeing up available policy space for the advance of progressive fiscal policy. But there is one problem, the President has to order the Secretary of the Treasury to mint a 1 oz. platinum with a face value high enough to provide for ending the debt. However, there is little possibility right now that Donald Trump will do that, since his Party after passing its huge tax cuts, plans to cut entitlements pleading that the government can’t afford them due to the size of the national debt.
The third permanent cure is OCF. It shares the advantage of ending the debt ceiling crises and also removing the debt issue from politics with the HVPCS solution. But, it too is politically infeasible because the Republican Congress will not, at this juncture, give up its debt ceiling weapon against programs favored by the Democrats in Congress.
Lastly, there is the cure of re-organizing the Fed under the Treasury. This is the best constitutional solution to the problems of debt ceiling crises and the existence of the debt; but it is also the one that the Republican Congress is most unlikely to support. So, none of the permanent cures is feasible or likely right now.
But, what happens if the Republicans lose both Houses of Congress in 2018. Then, depending on how progressive the new Congress is, change may be possible. The most likely change is repealing the debt limit law, since intense public pressure might be great enough to both move the Congress and the President to at least put an end to the damaging politics of debt ceiling crises.
The HVPCS, OCF, and Fed reorganization options are still unlikely since Trump or another Republican bent on austerity for everyone but the top end of business people will still be in the presidency, and will very likely retain enough support in Congress to prevent a hostile Congress from over-riding a presidential veto. So, any change that will remove the political problem of the national debt from politics will have to await 2021 at the earliest.
Then, if a progressive president and Congress are both elected, repeal of the debt limit bill is probably a certainty. The broader question is whether such a Congress will pass one of the permanent cures, or whether the President will order the HVPCS solution? In my view, the President may do that if she or he understands the over-riding political importance of removing the debt issue from politics for good, and completely re-orienting Washington away from austerity politics.
But it is much more likely that a progressive Congress will end the perceived but faux debt problem by passing OCF. OCF doesn’t go as far as ending the Fed, but it does end the political problems of the debt and the debt limit law by providing for gradual repayment of the debt without raising taxes in a highly visible way. So, opposition to it should be the least among the three permanent cures to both problems, and that is why it is likely to be the option passed by the first progressive Congress supported by a progressive in the White House.