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Fix the Debt The Progressive Way!

letsgetitdone's picture

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” and “fixing the debt” than they did 2 years ago. Their view is well-reflected in the “Summary of Fix the Debt” 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, 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, here, and here, 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 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 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 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.

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mtngun's picture
Submitted by mtngun on

It's important to make the public aware of the platinum coin option, if for no other reason than to debunk the "There Is No Alternative" BS.

Shared.

letsgetitdone's picture
Submitted by letsgetitdone on

I keep pushing and pushing, hoping it will get out there into the mainstream again.

zot23's picture
Submitted by zot23 on

that unfortunately you are also falling into letsgetitdone: you are is still caught in the "money as debt/credit" trap. That is to say you've swallowed half of the red pill, but the other half is still sitting on the table waiting for consumption. What use is it to be half awake or half free?

The other part of the red pill (IMHO) is the simple recognition that at its base money is a substitution of value to make commerce easier. That's it. Instead of lugging around 18 chickens to exchange for a cord of wood, both parties can trust and use these slips of paper that convey the value of the items (without having the items present.)

Why is this important to note? Because if you don't keep that idea central to a system and let money take on intrinsic value (in the minds of its users), people quickly degrade into hoarding and accruing money (not adding value to gain more of it.) It's a subtle shift but it happens in most people's minds. Once people start thinking this way, it is fairly simple for banks to gain an immense amount of power: after all, they can make "money" out of thin air (really credit via loaning but once you've swallowed their line it's money.) Then as a society we're all on the "money as credit/debt" treadmill that no one but the banks can win. This is really the system we are on now, the FED and the banks (same entity actually) control the flow of credit and keep almost everyone hostage via the govt in debt arbitrage. To think of this in an example: if the constitution allows Congress (and only Congress) the ability to create and distribute money, why does everyone look to the FED? Shouldn't Congress just be able to vote to print the $60 Trillion coin and direct it's use? Yes, we are saying that is the way it can and should be done. But why the hell haven't they been doing this all along? Why would our govt ever borrow any money from a private institution like a bank? As you mentioned, it can make currency out of thin air. The simplest answer is because the govt is in the money as debt trap, has been since the FED took control of printing (at the banks' behest) in the early 20th century.

This is all important to note because in your post you mention printing a $60 trillion coin (or whatever amount) and then giving X trillion to the FED to do with as they please. This is like storming the Bastille and then planning on giving 30% of the loot back to King Louis to use at his discretion. Well, he's going to use his money to undermine what you just did and take control of everything again. It's doesn't make any sense, King Louis had to go so the peasants could take over; the FED will have to go if MMT is to have any prayer of succeeding. If MMT has an enemy, it is the banking system topped by the FED. Until the FED is either neutered to what amounts to a congressional mandate major-domo or is done away with completely, we cannot free ourselves from this trap. No amount of platinum coins, no amount of good will, no austerity programs will help us take back what is rightfully ours: control of the currency supply and economic freedom.

I know this is the part we progressives don't like to hear, but the one person who could actually get something done about the FED is Ron Paul. Alan Grayson threw in with him while in the House, I would urge you (and any progressives truly interested in MMT) in doing the same. I'm not saying vote for him as President, I'm saying his idea to fully audit the FED is an achievable and rational first step to tearing down the existing system so that we can replace it with something real (like MMT.)

Otherwise, trying to work within half the system to fix the other half is folly. It's like Neo taking half the red pill so that he is aware he is sitting wired up in a coccoon but not being able to wake up and get out. It just doesn't work.

Anyway, good post though. The time for MMT is coming, but iI don't think it will be as simple as you've outlined here. Many powerful people have a whole lot lose if this system of thinking shifts, they will not go easily.

Submitted by lambert on

I really don't want to put my money (such as it is) in a bank. I want my money... somewhere safe. Alas, under the mattress or buried in the back yard is not safe.

I wish we had "Post Office" banks that functioned like public utilities. Just a place to park money. No usury, no gambling. Just park it.

letsgetitdone's picture
Submitted by letsgetitdone on

just public banks run by the Treasury?

Submitted by hipparchia on

we used to have it y'know, so we could do it again. the post office could use the money and the unbanked need an alternative to loan sharks, pawn shops and payday lenders.

letsgetitdone's picture
Submitted by letsgetitdone on

I'll let the first part of your reply go uncommented since it depends on the reasoning in the rest, and I think the rest is way off base on MMT.

". . . To think of this in an example: if the constitution allows Congress (and only Congress) the ability to create and distribute money, why does everyone look to the FED? Shouldn't Congress just be able to vote to print the $60 Trillion coin and direct it's use?"

Of course, but Congress already has that power enumerated in the Constitution. In delegating the currency power to the Fed it has not abrogated its own power to do the same thing. So, Congress is free to do that any time. To do so wouldn't violate MMT in the least.

"Yes, we are saying that is the way it can and should be done. But why the hell haven't they been doing this all along? Why would our govt ever borrow any money from a private institution like a bank?"

Truly, it is monumental stupidity, especially since we left the gold standard. Well, it is a matter of politics to end it. But doing it the way it is done now is not the fault of MMT.

"As you mentioned, it can make currency out of thin air. The simplest answer is because the govt is in the money as debt trap, has been since the FED took control of printing (at the banks' behest) in the early 20th century."

I have no idea what you mean by this. Clearly, there is no trap. The Government can get rid of debt anytime it wants to as I've just indicated in the above post. Nor is the coin the only way it can do it. Congress, if it wishes, can re-organize the Fed and place it within Treasury anytime it likes and then Treasury can generate all the funds it needs out of thin air to get rid of the debt. So the debt isn't there due to a "trap." It is there due to a choice; and a political choice can be changed.

"This is all important to note because in your post you mention printing a $60 trillion coin (or whatever amount) and then giving X trillion to the FED to do with as they please. This is like storming the Bastille and then planning on giving 30% of the loot back to King Louis to use at his discretion. Well, he's going to use his money to undermine what you just did and take control of everything again. It's doesn't make any sense, King Louis had to go so the peasants could take over; the FED will have to go if MMT is to have any prayer of succeeding. If MMT has an enemy, it is the banking system topped by the FED. Until the FED is either neutered to what amounts to a congressional mandate major-domo or is done away with completely, we cannot free ourselves from this trap. No amount of platinum coins, no amount of good will, no austerity programs will help us take back what is rightfully ours: control of the currency supply and economic freedom."

Giving the Fed back its money by paying off the debt it holds is pure form. The Fed can always generate money out of thin air; so the $2 Trillion or so they they'll get makes them neither richer nor poorer and gives them no additional capability than they have no. Nor does giving them $2 T make the treasury any poorer because it still retains the capacity to mint another coin worth $2 T or $60 T if it likes. Also, you need to understand that the minting of the $60 T coin would neuter the Fed. the reason is that as the debt is paid back and deficit spending occurs the banking system will be flooded with reserves, forcing the overnight interest rates down to zero. Therefore if the Fed wants to maintain a target overnight interest above zero, then it will have to pay interest on reserves, forcing the interest rate up. Its interest rate policy will therefore be bounded by Treasury spending, and it will have much less influence than it has now. Also, it won't have any role at all in targeting unemployment, since the Government will clearly be free to deficit spend at the option of Congress to end it and it won't be able to fob off the responsibility off to the Fed on grounds that the Fed alone has the money power

"I know this is the part we progressives don't like to hear, but the one person who could actually get something done about the FED is Ron Paul. Alan Grayson threw in with him while in the House, I would urge you (and any progressives truly interested in MMT) in doing the same. I'm not saying vote for him as President, I'm saying his idea to fully audit the FED is an achievable and rational first step to tearing down the existing system so that we can replace it with something real (like MMT.)"

Well, this I agree with. I'm all for continuous and full audits of the Fed and also full transparency for it. That will help to bring it under democratic control; which is where it should. Btw, MMT is in way opposed to this idea. I'm sure every one of the major MMT figures: Warren Mosler, Bill Mitchell, Randy Wray, Stephanie Kelton, Jamie Galbraith, Bill Black, Michael Hudson, Scott Fullwiler, and Pavlina Tcherneva would all support full transparency for the Fed. In addition, I think they would all support placing the Fed within Treasury as well.

Finally, the proposal I've made here is a pretty good start at breaking the political logjam and the austerity drive and also at diminishing the power of the Fed. As for the big banks in the system, bringing them under control requires law enforcement and changing the mark-to-market rule so that they can be taken into resolution. Again that's a matter of politics. As for MMT it certainly advocates an honest banking system, an end to the frauds and corruption, and is neutral on the question of whether banks ought to be publicly or privately owned.