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12th Jan 2013

The Debt Ceiling Must Be Destroyed

The entrance to the Senate Appropriations Committee room in the US Capitol, surmounted by Bellona the Roman goddess of war. (It used to be the Military Affairs Committee room.)

Under our consititutional system and current law:

Congress appropriates money to be spent on its programs by passing laws, and the Treasury is required to spend it.
Congress lays taxes by passing laws and the Treasury collects their revenue.
To the extent that the amount required to be spent exceeds the revenue that comes in, the Treasury typically sells bonds (i.e. borrows money) to cover the difference.
Congress also sets an absolute maximum on the amount the Treasury is permitted to borrow (the Debt Ceiling).

Assume for a moment that the only ways the Treasury can raise money are either collecting taxes or borrowing. In that case, items 1-3 above are a closed system. That is, Congress determines the amount that Treasury will borrow by setting mandatory spending and tax levels. In such a closed system, the Debt Ceiling law is either superfluous or inconsistent.

As the national debt has grown, the Debt Ceiling has begun making the ominous transition from superfluous to inconsistent, and free-for-all of a public debate has arisen over how to resolve the problem. What follows is an attempt at a taxonomy of those solutions.

Increase tax revenue or decrease spending on programs. Congress has undertaken both tax increases and spending cuts, but all agree that the measures Congress has taken will not be sufficient to resolve the problem. There does not appear to be political will to do more (moreover, either or both courses of action may be economically inadvisable).
Break one of the laws — either: (a) fail to make some required payments or (b) borrow money in violation of the debt ceiling. The only legal justification for option (a) other than the impossibility of following both the spending and tax laws and the Debt Ceiling law. Option (b) could be justified on the same “impossibility” grounds; defenders of option (b) could also rely upon an interpretation of the public debt clause of the 14th amendment, which was intended to prevent Congress from reneging on duly authorized civil war debt. That theory is generally regarded to be shaky and the White House has ruled out using it (I think it has some merit). Any failure to make payments, per option (a), would lead to bad economic consequences, but there is a spectrum of seriousness depending on what payments the government fails to make: bond payments (apocalyptic), entitlement payments (really really bad), federal contractors and employees (really bad)). Option (b) would more or less maintain the economic status quo.
Open up the closed system via seigniorage. This is the idea behind the trillion dollar coin. The Treasury Secretary would use an arcane statute to mint currency that would be used to satisfy the Treasury’s spending obligations without further borrowing.Platinum coin seigniorage is the only solution that appears to comply with current law in all respects (without changing any laws). Seigniorage is also, I think, the idea behind the Treasury IOU solution that some have proposed—though that solution sits on much shakier legal ground.
Abolish the Debt Ceiling. This is the best solution of all.

UPDATE: It appears the Treasury and the Fed ruled out the platinum coin option today.

10th Jan 2013

The New York Times has a Very Serious Proposal for a Shadow Currency

USC tax law professor Edward Kleinbard thinks that minting the platinum coin is “fantastical,” and he has a Very Serious alternative proposal:

There is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.

Short version: Let’s postpone paying back our debts with a no maturity, zero coupon, federal IOU that President Obama creates by executive order.

A couple thoughts on this:

Kleinbard’s IOUs are probably a whole new fiat currency. They would be perpetual obligations of the government that are freely transferable and earn no interest—just like the bills in your wallet.
Coining money is one of Congress’ constitutionally enumerated powers, so the executive branch would face pretty heavy judicial scrutiny if it just popped off and exercised that power for its own purposes. Encroaching on Congress’s powers without statutory authority is much shakier legal ground than simply using explicit statutory authority. (Harry Truman learned this the hard way.)
(By the way, I can’t understand why Kleinbard says, later in his piece, that his scrip program “would not explicitly challenge any constitutional allocation of powers.” Of course it would! Even if you don’t believe anything I wrote above, getting around Congress’s debt ceiling by executive legerdemain is the whole game here.)
Kleinbard’s idea is to evade the debt ceiling by executive order—with no pretense of Congressional authorization. Proponents of the platinum coin, by contrast, are suggesting the executive use his clear authority under an existing (arcane!) statutory grant to circumvent the debt ceiling. An enormously valuable coin may seem a little silly, but there’s no question that using statutory authority is going to be a much more defensible position in court.

In any case, Kleinbard is proposing that we attempt to pay back dollar denominated obligations with something other than dollars on the table. That something is going to be either:

a brand new—awfully sketchy—currency, or
an IOU that says, in effect:

Dear U.S. Creditor-

There’s no money for you today. Perhaps there will be later. I’ll call you.

-Uncle Sam

PS No more interest for you!

PPS You might now be subordinated to my other creditors.

Kleinbard needs to explain to us why either one of those scenarios doesn’t amount to a flat-out default.

28th May 2012 | 4 notes

Frederick Douglass: Decoration Day Speech

The Unknown Loyal Dead

Arlington National Cemetery, Virginia, on Decoration Day, May 30, 1871

Friends and Fellow Citizens:

Tarry here for a moment. My words shall be few and simple. The solemn rites of this hour and place call for no lengthened speech. There is, in the very air of this resting-ground of the unknown dead a silent, subtle and all-pervading eloquence, far more touching, impressive, and thrilling than living lips have ever uttered. Into the measureless depths of every loyal soul it is now whispering lessons of all that is precious, priceless, holiest, and most enduring in human existence.

Dark and sad will be the hour to this nation when it forgets to pay grateful homage to its greatest benefactors. The offering we bring to-day is due alike to the patriot soldiers dead and their noble comrades who still live; for, whether living or dead, whether in time or eternity, the loyal soldiers who imperiled all for country and freedom are one and inseparable.

Those unknown heroes whose whitened bones have been piously gathered here, and whose green graves we now strew with sweet and beautiful flowers, choice emblems alike of pure hearts and brave spirits, reached, in their glorious career that last highest point of nobleness beyond which human power cannot go. They died for their country.

No loftier tribute can be paid to the most illustrious of all the benefactors of mankind than we pay to these unrecognized soldiers when we write above their graves this shining epitaph.

When the dark and vengeful spirit of slavery, always ambitious, preferring to rule in hell than to serve in heaven, fired the Southern heart and stirred all the malign elements of discord, when our great Republic, the hope of freedom and self-government throughout the world, had reached the point of supreme peril, when the Union of these states was torn and rent asunder at the center, and the armies of a gigantic rebellion came forth with broad blades and bloody hands to destroy the very foundations of American society, the unknown braves who flung themselves into the yawning chasm, where cannon roared and bullets whistled, fought and fell. They died for their country.

We are sometimes asked, in the name of patriotism, to forget the merits of this fearful struggle, and to remember with equal admiration those who struck at the nation’s life and those who struck to save it, those who fought for slavery and those who fought for liberty and justice.

I am no minister of malice. I would not strike the fallen. I would not repel the repentant; but may my “right hand forget her cunning and my tongue cleave to the roof of my mouth,” if I forget the difference between the parties to that terrible, protracted, and bloody conflict.

If we ought to forget a war which has filled our land with widows and orphans; which has made stumps of men of the very flower of our youth; which has sent them on the journey of life armless, legless, maimed and mutilated; which has piled up a debt heavier than a mountain of gold, swept uncounted thousands of men into bloody graves and planted agony at a million hearthstones — I say, if this war is to be forgotten, I ask, in the name of all things sacred, what shall men remember?

The essence and significance of our devotions here to-day are not to be found in the fact that the men whose remains fill these graves were brave in battle. If we met simply to show our sense of bravery, we should find enough on both sides to kindle admiration. In the raging storm of fire and blood, in the fierce torrent of shot and shell, of sword and bayonet, whether on foot or on horse, unflinching courage marked the rebel not less than the loyal soldier.

But we are not here to applaud manly courage, save as it has been displayed in a noble cause. We must never forget that victory to the rebellion meant death to the republic. We must never forget that the loyal soldiers who rest beneath this sod flung themselves between the nation and the nation’s destroyers. If today we have a country not boiling in an agony of blood, like France, if now we have a united country, no longer cursed by the hell-black system of human bondage, if the American name is no longer a by-word and a hissing to a mocking earth, if the star-spangled banner floats only over free American citizens in every quarter of the land, and our country has before it a long and glorious career of justice, liberty, and civilization, we are indebted to the unselfish devotion of the noble army who rest in these honored graves all around us.