Originally published November 10, 2011 on the New Economic Perspectives blog.
Thanks for comments and apologies for being late. I justreturned from Rio. And lest you think I was just tanning on the beach, I wasactually indoors at a conference—underground, no less.
Rather than repeating the questions, let me justsummarize six key issues raised.
- We need to tie ourselves to the masthead of budget limits to keep politicians from spending too much. For better or worse we have a budgeting process through which Congress decides how much to allocate to programs, then submits the plan to the President. Once approved, this authorizes spending. That is the “democratic” process through which our elected representatives decide which programs are worthy of funding—and at what levels. Much of the spending is “open-ended” in the sense that it is contingent (unemployment benefits paid will depend on economic performance, for example). I do not see how adding a constraint beyond this is either necessary or consistent with democratic control and accountability. Certainly I do not support many or even most of the programs Congress and the President decide to fund. I can vote to throw the bums out. If I’m rich enough, I can try to buy them off with campaign contributions. By its very nature a debt limit is arbitrary and inconsistent with the budgeting process. In the past, it never mattered—the budget trumped the limit and Congress routinely raised the limit. Now the politics of a minority is trying to subvert the budgeting process. In truth, the bigger danger is the new super-duper hand-picked for ignorance deficit committee that is authorized to ignore Congress’s will as expressed in the budget and to slash and burn programs in a thoroughly undemocratic manner.
- Public goods provision is always less efficient than private goods provision; and production of public goods crowds-out private goods and hence must reduce overall efficiency. This is faith-based economics of the worst sort. It has absolutely no evidence to support it and defies any logic. Outside of communist or socialist societies, I truthfully cannot see any legitimate use for the hazy term “efficiency” in economics. Unlike communist societies, capitalist societies never operate near to full capacity (with World Wars the only possible exception) and hence it is never a simple matter of taking resources away from private use to support public use. And in any case, one cannot imagine any private production without first having in place public provisioning.
- A bloated government is a drag on growth and causes inflation. Could be true. However, everywhere I look in the West (that is to say, among developed nations) the problem is government that is far too small to succeed in the tasks at hand. Too much privatization, too many idle resources, inadequate provision of essential public services.
- Who has the authority to issue “warrants” or “platinum coins”? As discussed above, Congress and the President first work out a budget. That authorizes Treasury spending. We can come up with all sorts of procedures to allow Treasury to accomplish that task. A relatively primitive but effective one would be for it to simply print up Treasury notes and spend. Or it can directly keystroke entries into the deposit accounts of recipients—but that requires that Treasury can also keystroke reserves onto bank balance sheets. Since we divide the tasks between Treasury and Fed, having banks “bank at the Fed”, it must be the Fed that keystrokes the reserves. There is no fundamental reason for this—banks could have accounts at the Treasury used for clearing and then the Treasury would keystroke the reserves. But we don’t do it that way. So we could have the Fed act as the Treasury’s bank, accepting a Treasury IOU and keystroking bank reserves. But we don’t do that either—we say that although the Fed is the Treasury’s bank, it is prohibited from directly accepting a Treasury IOU. And hence we created complex procedures that involve private banks, the Fed and the Treasury to accomplish the same thing.
Now I went through all that simply as an introduction to the warrant and platinum coins proposals. Treasury has the authority to issue platinum coins in any denomination, so could for example make large payments for military weapons by stamping large denomination platinum coins. It would thereby skip the Fed and private banks. And since coins (and reserves and Federal Reserve notes) don’t count as government debt for purposes of the debt limit this also allows the Treasury to avoid increasing debt as it spends platinum coins. Similarly we could create some new IOU we call a warrant that is made acceptable (for example) in tax payment. It would be a Treasury IOU but would not be counted among the bills and bonds that total to the government debt. Like currency it would be “redeemed” in tax payment, hence demanded by those with taxes due. So it is just another finesse to get around arbitrary limits or procedures put on Treasury spending.
- Total Fed commitments (so far) to bailout Wall Street: $29 trillion. That figure results from a close study by two UMKC PhD students who will soon be releasing their study.
- What about Italy (etc)? Do they face market imposed debt limits (rather than simply tying their shoes together voluntarily)? Yes. Go to my GLF blog today. They are now more like US states, users not issuers of the currency.