Commerce Sells, but Who's Buying?

By Mitch Green

You have to wonder if the president ever hears from his commerce secretary these days.  Friday's GDP revisions by the Bureau of Economic Analysis should send a pretty strong signal that the economy is far from recovering, making clear that job killing spending cuts should be last thing on his mind:

           

“While the headline number was well below expectations of 1.8%, what must be noted are the major revisions. Q1 2011 is now reported as +0.4%. That’s a major downward revision which demonstrates that QE2 was in fact doing nothing for growth and that the US is already at stall speed even without the negative impact of the European sovereign debt crisis and the debt ceiling fiasco. The double dip scare is real.”  Ed Harrison, Credit Writedowns

           

Unfortunately, the president doesn't demonstrate any evidence that he's heard this news.  For all we know, he might have tasked Secretary Locke to go out and "truck, barter and trade" with the American people in an effort to win the future.  So maybe instead of leveling with the president, Locke is out setting up lemon-aid stands across the country.  Who knows?

Where is the “Recovery”? Where Did the “Stimulus” Go?

By Eric Tymoigne

The new BEA figures about economic activity continue to point to a replay of a Japanese-style lost decade or, even worse, a 1937 scenario. The current expansion has been the weakest on record since World War Two and the trend since the early 1980s does not provide much comfort. Figure 1 shows that each economic expansion since the 1980s has been weaker and weaker and the rate of decline has accelerated.

The current debate in Washington does not provide any comfort for the short run or the long run with both political parties willing to jeopardize whatever economic growth we have left over a fictitious ceiling that serves no economic purpose. All this suffering is supposed to help in the long run because of the good that will come from “reforming” (read “dismantling”) pillars of economic progress like Social Security.

The 2009 Obama “stimulus” is long gone and all levels of government negatively contributing to economic growth. Since the third quarter of 2009, the contribution of the government to economic growth has been nil on average. 

The Debt Ceiling and America’s Stockholm Syndrome

By Pavlina R. Tcherneva

Keynes once said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” (Keynes 1964, 383). Two among those modern economists must surely be Reinhart and Rogoff, as no other book in recent history has contributed so much to the mass phobia and delusion about the debt and the deficit as theirs. This is a book that reinforces some of the worst ideas in the economics profession, a profession that refuses to acknowledge that we are no longer on a gold standard and that a government which has a monopoly over its own currency can both supply it without facing default and regulate its value.

Now, you may be a gold bug who fantasizes about the gold standard of the middle ages and the Dickensian industrial world, or you may be Hayekian who dreams of a market with competing private media of exchange without any state ‘usurping’ power over the issue of money, or you may simply wish to barter with your fellow citizens and not bother with this debt business at all. This is all fine and good, but the latter two types of systems have rarely (if ever) existed in history and the gold standard episodes have always ended in deflations, crises, and disaster. So this is what we’ve got in the US—a state money system. A system in which the state determines the unit of account (an abstract measure called “the dollar”) and issues the very thing that serves as that unit of account and medium of exchange (a paper thingy that also happens to be called a ‘dollar’ or an electronic reserve with the same name). Yes! Monopoly money, or more accurately, state monopoly money. This is the system that we’ve got and the system that we have to work with. And as a monopolist that issues its own currency, the US government need not default. Ever. But Reinhard and Rogoff failed to distinguish between countries which control their own currencies from those that don’t when they warned of the ‘dangerous’ levels the US debt was approaching.

Marshall Auerback on Fox Business: Obama Closer to Tea Party than Democrats

Here is Marshall Auerback's latest appearance on Fox Business, where he makes the argument that Barack Obama's deficit cutting ambitions place him closer to the Tea Party than his own Democrats.

Two Theories of Prices

By Eric Tymoigne

Last May, John T. Harvey wrote a wonderful post about the quantity theory of money (QTM). This post picks up where John stopped, presenting a different theory of the price level and inflation. It’s a bit technical (so bare with me), but many readers have asked us to elaborate on price theory.

First, a quick recap. The QTM starts with the identity MV ≡ PQ, where M = the money supply, V = the velocity of money, P = the price level, and Q = the quantity of output (Fisher’s version is broader and includes all transactions: T). The identity is a tautology, it just says that the amount of transactions on goods and services (PQ) is equal the to the amount of financial transactions needed to complete those transactions. To get a theory of price (the QTM), one must make some assumptions about each variable. The QTM assumes that:

·         M is constant (or grows at a constant rate) and is controlled by the central bank through a money multiplier

·         V is constant

·         Q is constant at its full employment level (Qfe) or grows at its natural rate (gn)

Given this set of assumptions, we get (note the equality sign to signal causality):

P = MV/Qfe

Or, in terms of the growth rate (V is constant so its growth rate is zero):

gp = gm – gn

This is the QTM, which holds that price changes (inflation and deflation) have monetary origins, i.e. if the money supply grows faster than the natural rate of economic growth, there is some inflation.  For example, if gm = 2% and gn = 1% then gp = 1%.  If the central bank increases the money supply, then inflation rises.

John’s post explains the problems with this theory. M is endogenous, V is not constant, and the economy is rarely at full employment. If you want to know more, you should read John’s post.

RESPONSE TO BLOG 8: MORE ON TAXES DRIVE MONEY

By L. Randall Wray

Thanks again for well-focused questions and comments. Here we are concerned with why government “fiat”currency is accepted. The short answer was that “taxes drive money”: since you have a tax liability that must be cleared by delivering the government’s own currency back to government, you want to obtain government currency. So in that sense, it is the tax liability that drives the desire to obtain government currency.

I did leave a couple of teasers, which some touched on in their comments. First, does it have to be a tax? Clearly the answer is “no”: if government imposes a fine on you in the form of five Dollars, you need five Dollars in the form government is willing to accept to pay your fine—sovereign currency. Until the 20^th century, taxes were relatively less important; what mattered more were fines and tithes and fees.

To go further, let us say government monopolizes the water supply (or energy supply, or access to the gods, etc); it can then name what you need to deliver to obtain water (energy, religious dispensation, etc). In that case, if it says you must obtain a government IOU, then you want government IOUs—currency—to obtain water in order to avoid death by dehydration. In early 19^th century England, almost all activities necessary to keep your family alive were illegal by dictate of the crown. You had to pay a fine after you killed game to feed your family. You needed the crown’s currency to pay the fine—hence “fees drove money”. You get the picture.

All you need to drive a currency is a more or less involuntary obligation to deliver the currency—and that can be a tax, fee, fine, or even religious tithe. Or a payment to obtain water or any other necessity. We can go into this later, but at UMKC students need buckaroos to pay a “tax” to pass their courses—that drives the buckaroo currency—it creates a demand for buckaroos (the sovereign currency at UMKC).

That answers the question: yes it is not enough to impose the obligation (fee, fine, tax); the obligation must also be enforced. A tax liability that is never enforced will not drive a currency. A tax that is only loosely enforced can create some demand for the currency, but it will be somewhat less than the tax liability for the simple reason that many will expect they can evade the tax.

We can next move on to the second teaser: why would those who do not have tax liabilities also be willing to accept currency?

That leads us to the Tobin, “snowball” point: if some segment of society owes the tax (or fee or fine) denominated in the currency, others will accept it. Note this is not an infinite regress argument. It is the tax standing behind the currency. But it is not necessary for every individual to owe the tax.

Let us say that Bill Gates owes $1.5 trillion in taxes. I’d be happy to accept Dollars since I know Gates will accept them when I purchase Microsoft software. And that explains why foreigners want dollars—not because they owe taxes, but because a sufficient number of Bill Gates do.

From inception we know that if the total tax liability in dollars is, say, $100 billion, the taxpayers will want a minimum of $100 billion. (How much more? $120 billion? $180 billion? We will investigate that later.) Government can spend into the economy at least that amount.

How much will the Dollar be worth? Well, that depends on what must be done to obtain it. We will have much more to say about that in coming weeks.

A commentator did hit on this point: what if the tax liability is too low? Let us say the tax liability is $100 billion but government tries to spend $1000 billion. This is ten times what the taxpayers need to cover their liabilities. It is possible—even probable—that government will not be able to find takers for the $1000 billion. It can bid the price it is willing to pay (for labor, finished output, or resource inputs) up, but still find no takers. We could register “inflation” and still find government cannot spend as much as it wants.

A better solution—obviously—is to raise the tax liability toward $1000 billion, rather than to increase the price government is willing to pay. Again, that is something we will come back to, but it also sheds some light on what determines the value of the currency. As I said last week, we need to separate the willingness to accept currency from the value of the currency. Raising the tax liability will increase the desire to obtain currency although that does not tell us exactly how much the value of currency (in terms of labor or other resources) will rise.

Valuing something like a bridge is very difficult—especially if we are talking about a bridge already in place. Fortunately, it is also a question that is not very important, so long as the bridge is public—not owned by some profit seeking entity. There really is very little reason to value public infrastructure once it is in place, except perhaps in terms of all the pleasure it provides to the population. That is probably something that cannot be and should not be measured in money terms.

But, yes, raising the tax liability while holding government issue of the currency constant is likely to lead to what we might call unemployment: those willing to work to get the currency in order to pay taxes, but who cannot find work or demand for output to obtain the currency.

We will later go through the accounting to answer the question raised by a commentator: what about the reserve effects of tax payments? But, briefly, yes, paying taxes will all else equal reduce outstanding bank reserves. In practice, if the central bank targets overnight interest rates, it will replace lost reserves if they were desired or required—by lending at the discount window or through open market purchases of treasuries.

There were several questions/comments that were not comprehensible to me: what about interest, which requires one to repay more than what is owed. I do not see the relevance to this week’s topic. What about issuing money with no offsetting debt? Well, all money “things” are IOUs hence are debts, hence there is no possibility of issuing money that is not a debt. What about socio/political ramifications of who pays the tax? Yes very important, but I do not see the relevance to the topic at hand.

OK I hope I have covered the main comments and questions. More next week.

The High Price of the President’s Council of Economic Advisors’ Failure to Read Akerlof & Romer

By William K. Black

(Cross-posted from Benzinga.com)

By reviewing the annual reports (2005-2007) of President Bush’s Council of Economic Advisors (CEA) I learned that the Council had some interest in fraud, but no understanding of elite fraud and its implications for the economy.  The reports make sad reading.  They deny the developing crisis entirely and they do so for reasons that reflect badly on economics and economists. 

The CEA’s reports’ analysis of the developing fraud epidemics and crisis reveal critical weaknesses in theory, methodology, empiricism, candor, objectivity, and multi-disciplinarity.  Overwhelmingly, the reports ignored the developing crises and their causes.  Worse, as late as 2007, they denied – even after the bubble had popped – that there was a housing bubble.  When the nation and the President vitally needed a warning from its Council of Economic Advisors the CEA did not simply fail to warn, but actually advised that those who warned of a coming crisis were wrong. 

This column does not focus on the CEA’s claims that there was no housing bubble.  Like the National Association of Realtors’ top economist who became known to the trade press as “Baghdad Bob” (the mocking nickname journalists gave Saddam Hussein’s press flack after he denied U.S. troops were in Baghdad), the CEA’s specious bubble denial is an obvious embarrassment.  Their Japanese counterparts did far better in warning of the developing real estate bubble in the 1980s.  The collapse of the twin Japanese bubbles in 1990 and the resultant “lost decade” should have caused the CEA to recognize the gravity of the risk bubbles pose and importance of identifying them promptly.  Instead, the CEA gave in to the temptation to claim that the President’s brilliant policies had produced a wonderful economy.  The reality was that the economy was headed over the precipice.

The focus of this column is on the portion of the CEA’s annual report for 2006 that discussed the theory of financial intermediation and financial regulation.  Indeed, the column focuses on a small subset of the defects in those portions of the report.  I write to emphasize how a theory (“control fraud”) developed two decades ago by regulators, criminologists, and economists could have saved the CEA from analytical and policy errors with regard to financial crises and regulation and led it to identify the crisis and recommend effective measures to contain it.  The tragedy is that the CEA discussion of the theory of financial regulation embraces three of the most useful theoretical insights – adverse selection, lemon’s markets, and the centrality and criticality of sound underwriting to the survival of lending institutions.  These theories are interrelated and they are essential components of control fraud theory.  

Worse than Hoover

By Marshall Auerback

It’s actually a bit over the top and unfair to compare Barack Obama with Herbert Hoover – unfair that is, to the memory of Herbert Hoover.  The received image of the latter is the dour, technocrat who looked on with indifference while the country went to pieces.  This is actually an exaggeration.  As Kevin Baker convincingly argued in his Harper’s Magazine piece, “Barack Hoover Obama”, President Hoover did try to organize national, voluntary efforts to hire the unemployed, provide charity, and sought to create a private banking pool. When these efforts collapsed or fell short, he started a dozen Home Loan Discount Banks to help individuals refinance their mortgages and save their homes.  Indeed, the Reconstruction Finance Corporation, which became famous for its exploits under FDR and Jesse Jones, was actually created by Hoover.  Often tarred with the liquidationist philosophy of his Treasury Secretary, the establishment of the RFC was, as Baker suggested, “a direct rebuttal to Andrew Mellon’s prescription of creative destruction. Rather than liquidating banks, railroads, and agricultural cooperatives, the RFC would lend them money to stay afloat.”

MMP BLOG #8: TAXES DRIVE MONEY

By L. RANDALL WRAY

Last week we raised the following question: Where currency cannot be exchanged for precious metal, and if legal tender laws are neither necessary nor sufficient to ensure acceptance of a currency, and if the government’s “promise to pay” really amounts to nothing more than exchanging one 5 Dollar note for another 5 Dollar note, then why would anyone accept a government’s currency? This week we explore the MMT answer.

Taxes drive money. One of the most important powers claimed by sovereign government is the authority to levy and collect taxes (and other payments made to government including fees and fines). Tax obligations are levied in the national money of account—dollars in the US, Canada, and Australia, Yen in Japan, Yuan in China, and Pesos in Mexico. Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In all modern nations, it is the government’s own currency that is accepted in payment of taxes.

WHY IS CURRENCY ACCEPTED? RESPONSES TO COMMENTS ON MMP BLOG #7

By L. RANDALL WRAY

So the Telenovela trick worked: many good comments and questions, with no one destroying the plot line.

Let me briefly address them by grouping them into six general areas. And then on Monday we will give an answer to the question: why would anyone accept a sovereign currency? On the comments page I already addressed two questions so will not repeat my answers to those here.

Scott Sumner Agrees that MMT Policy Proposals Are Not Inflationary

By Scott Fullwiler

Scott Sumner sets out to debunk theories of the price level not based on a form of the quantity theory of money, and lumps MMT in with those approaches that “deny open market purchases are inflationary, because you are just exchanging one form of government debt for another.” While this is true, what’s interesting is that from within Sumner’s own paradigm, MMT-related proposals should not be inflationary. This is clear right off the bat when he lists his first “qualifier” or exception to the quantity theory:

1. If the new base money is interest-bearing reserves, I fully agree that OMOs may not be inflationary.  That’s exchanging one type of debt for another. 

And that is about all we need to hear. As we’ve said probably gazillions of times, you can’t have discretionary open market operations beyond that which is consistent with the Fed achieving its federal funds rate target unless an interest-bearing alternative to reserve balances is offered. Traditionally, this has been Treasury securities issued by the Treasury or sold by the Fed. The only way to leave all the reserve balances circulating and achieve a positive interest rate target at the same time would be to pay interest on reserve balances.

For instance, later, when Sumner writes, “Now suppose that in 2007 the US monetized the entire net debt, exchanging $6 trillion in non-interest bearing base money for T-securities,” hopefully he realizes that this is not operationally possible without paying interest at the target rate on the excess reserve balances created unless the Fed wanted to have a zero-rate target.

Coin Seigniorage: A Legal Alternative and Maybe the President's Duty

By Joe Firestone
(Cross-posted from Correntewire.com.)

(Author's Note; Many thanks to lambert strether, beowulf, and Yves Smith for their reviews of this post)

Well, the debt limit crisis is upon us. Treasury Secretary Geithner says the US Government will not be able to meet all its obligations on August 3, unless the debt ceiling is increased by Congress. The Secretary says he is out of moves to extend this date. I don't think that's true. I think he can use proof platinum coin seigniorage to supply all the money needed to spend Congressional Appropriations. I do not know if the Administration knows about this idea yet. It may, and it may simply have been unwilling to mention it for its own reasons. But just in case it doesn't know, and also for the sake of the rest of us, I'm making another attempt to state the case for using coin seigniorage, so that as many people as possible know that the President has an alternative to the “shock doctrine,” make a deal approach to cutting essential spending and services including the social safety net, in return for getting $2.6 Trillion more in debt issuance authority.

The idea of using coin seigniorage to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf. He first presented the idea in comments and then posted the seminal blog on coin seigniorage.

Throughout the next six months, a number of other posts appeared at various sites (See here for links) with increasing frequency as the debt limit problem received more attention.

In the last few days, as coin seigniorage itself climbed up the hierarchy of public awareness, Felix Salmon and Matt Yglesias, both well-respected, mainstream, and professional bloggers, have mentioned the proposal while taking issue with it for reasons I'll analyze below. Before, I do that however, here's what's involved in proof platinum coin seigniorage,

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint's costs in producing the coins and the credit provided by the Fed is the US Mint's profit. The US code also provides for the Treasury to periodically “sweep” the Mint's account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, could close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

Recent Comments from the Mainstream

Here's Felix Salmon's treatment at Reuter's:

Even if Treasury can still sell bonds, however, that doesn’t mean for a minute that breaching the debt ceiling is something which should be considered possible for the purposes of the current negotiation. Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)

Felix Salmon does give an acceptable one sentence overview of the proposal, but doesn't make clear that there could be even a single coin (not a "couple of coins") of arbitrary value produced by the US Mint. More importantly, he doesn't make clear why using coin seigniorage would be a sign “. . . of the utter failure of the US political system and civil society,” or why using it would be “. . . breaching the debt ceiling.” He also doesn't say why he lumps in a 14th Amendment challenge to the debt ceiling with coin seigniorage as crazy ideas.

Addressing these points one by one, first, it's true that the Congress hasn't been able to come to agreement on the debt ceiling, but it's hard to see why this is a sign of “the utter failure” . . . “of civil society.” Even more, the US political system has provided the tool of coin seigniorage as a legal, if not customary, way of generating revenue in addition to taxing and borrowing. Why does this count as “crazier” idea or a failure of the political system? From my point of view the only failure here is the President's in not using coin seigniorage, or perhaps not yet even knowing about it. But if this is a failure, I don't see that it's a systemic one as much as it is a failure of this Administration to look for alternative views that go beyond its own knowledge and imagination.

Second, it's hard to see why using coin seigniorage would be “breaching the debt ceiling.” Certainly, challenging the Constitutionality of the debt ceiling and overturning the legislation mandating it might be described as “breaching” it. Also, just ignoring it on grounds that it is unconstitutional might be described in the same way. However, using proof platinum coin seigniorage with very high face value coins just spends Congressional appropriations, including paying down debt so that it's way below the debt ceiling, or even completely eliminated, using perfectly legal means. It's hard to see how this can be legitimately described as “breaching the debt ceiling.”

And, third, why does Felix Salmon think that using coin seigniorage “. . . could mean the loss of America’s status as a safe haven and a reserve currency. ” Why should a demonstration, using coin seigniorage, of the Treasury's power to meet US obligations even when Congress is in deadlock, lead to a loss of confidence, making investment in the US look any more dangerous than it is at present, or disturbing the status of the US dollar as the reserve currency? Surely if Felix Salmon wants to make such a serious charge he should at least give readers his reasoning.

It is possible that if coin seigniorage were used on a continuing basis to close the gap between taxes and spending, then US Treasuries would no longer be a safe haven for investing USD reserves, simply because, if no more debt is issued, then no investment in Treasuries is possible. But even if that happened, a low level of interest paid by the Fed on USD reserves would still leave US dollar reserves as safe a haven for holding “risk-free” US financial assets as short-term Treasuries are right now.

It is also hard to see why coin seigniorage, if used, would interfere with the status of USD as the reserve currency. Why should it, since continuous use of seigniorage would result in gradually eliminating the national debt? And what other reserve currency would the world use? The UK pound? The Euro, with its great potential instability? The Yuan, which if it became the reserve currency would force China to give up its peg to the Dollar and to even acquire a bit of a disadvantage in trading with us? What about the Yen? Sounds OK to me, but the world seems convinced that Japan, with its 200% debt-to-GDP ratio might have runaway inflation anytime now. So, will the world take the Yen? Probably not.

What about a market basket of freely floating currencies? Well, that would be fine, but it's hard to see how that would disadvantage us or cost us $2 Trillion. I also wonder where Felix Salmon got that estimate from. Also, is the $2Trillion an interest cost, a reduction in GDP? Is it over one year, or a decade? Isn't it a fact, that being the reserve currency costs us exports and jobs? How does that get factored into Salmon's $2 Trillion cost of not being the reserve currency?

Matt Yglesias is the second popular blogger mentioning coin seigniorage last week. Matt says:

This is an idea that’s circulating in Modern Monetary Theory circles, and I believe that it’s legally mistaken.

Perhaps it is. But don't you owe it to readers to tell them why?

That said, conceptually it highlights a very accurate point. If you think of the United States government as a consolidated entity, it’s not possible for us to “run out of money” or “go bankrupt.” The government of Ireland owes euros, but it lacks the legal authority to create Euros. Governments of small developing countries often owe dollars, but lack the legal authority to create dollars. Under a gold standard, a government might owe gold and lack the physical capacity to create it. But the United States is owed dollars, and can create dollars, so it’s absurd to think that we might not be able to pay our bills.

Matt understands this very basic point of MMT, and that puts him miles ahead of most who pronounce on solvency. But it's also important to emphasize that Governments like our own can become insolvent voluntarily. That is, if Congress fails to raise the debt ceiling, or if, in the event they fail, the President fails to use coin seigniorage or another Treasury tool to create a positive balance in the Treasury General Account (TGA) at the Fed, then we can become voluntarily insolvent – a self-inflicted wound caused by a collective failure to understand our fiat currency and monetary system.

Now what might happen is that people lose willingness to lend us dollars in the future. We also might have inflation. Money was lent in the past on the assumption that dollars would be able to purchase real goods and services. Monetization of debt would reduce the real purchasing power of dollars, and might call into question the wisdom of agreeing to lend dollars in the future. But these are different issues.

First, if, as Matt recognizes, we can't “run out of money” then why do we need people to lend us our own currency in the future? Why can't we use coin seigniorage indefinitely for “deficit spending?” (From a technical point of view continuous use of proof platinum coin seigniorage would end deficit spending because it would close the gap between spending and taxes with miscellaneous receipts, a class of revenue. However, the gap between taxes and spending would remain and that “deficit” represents a surplus for the non-Government sector.) If we did that we'd avoid, as time went on, most spending on interest costs projected by CBO over the next 10 years. Indeed, if we project out to 15 years based on CBO 10-year numbers, we'd avoid nearly $12 Trillion in projected interest costs. Why borrow our own money back at all? The answer is we don't need to. So, we don't really have to care whether people want to lend us back our own money, or not.

Second, why would coin seigniorage in itself cause inflation? Coin seigniorage creates money to spend Congressional appropriations. As long as those appropriations are not so great that they exceed the potential productive capacity of our economy -- and right now our output gap is around 30%, and there is no sign of Congress deciding to spend enough to close that gap -- there will be no demand-pull inflation.

Would there be cost-push inflation? Not from coin seigniorage. The coins would just go into a Fed vault forever, and again the spending will be only what Congress appropriates. Coin seignorage will add to aggregate demand whenever spending exceeds taxes; but it will not cause cost-push inflation. That is caused by suppliers or speculators who are distorting markets. And the remedy for that is criminal investigations, price controls, rationing, and a thoroughgoing belief that markets must be very closely regulated by independent adversarial enforcers if they are to remain free.

Third, “money was lent in the past on the assumption that dollars would be able to purchase goods and services in the future.” But, again, why should the simple fact of using coin seigniorage debase the currency? Matt needs to explain the transmission mechanism from using seigniorage to spend Congressional appropriations and pay down debt, to currency debasement. Saying that “we also might have inflation” is easy. But one really has to show that the likelihood of inflation is greater if we use coin seigniorage than it is if we issue more debt instead. My view is good luck with that, because there are very good reasons for thinking that coin seigniorage would actually be less inflationary than issuing debt to close the gap between taxes and spending would be.

Fourth, “monetization” is a term that is frequently thrown around whenever the Government wants to use its Constitutional power to deficit spend and create money in the process. But “monetization of debt” has a strict meaning in modern economies. It refers to the purchase of debt instruments by the Central Bank from the Treasury. That wouldn't be happening here.

Here's how coin seignorage works: Legal tender, money, in the form of proof platinum coins, not legally viewed as debt, is being exchanged for USD credits in the US Mint's Public Enterprise Fund account. The money goes into the Fed vaults, the USD credits go into the Mint's account. The profits from seigniorage go into the TGA. This is an asset swap, between the Fed and the US Mint, of money in the form of a coin, for money in the form of bank reserves. Both sides of the swap are money; so there is no “monetization of debt” involved.

[UPDATE] I now think this might be legal after all, provided the coin is made of palladium.

Palladium coins won't do; we need coins that can be legally given an arbitrarily high face value. The palladium coins are specified by Congress at $25 in face value. The platinum coins being discussed in the coin seigniorage proposal are proof platinum coins. The face value of these coins is arbitrary and has nothing to with the value of the metal. Platinum proof coins are strictly fiat money, and they can have as a large a face value as the Mint likes. Just like the USD reserves the Fed creates for quantitative easing, or to increase the money supply.

So, after months of blogging, commenting, and tweeting about the coin seigniorage option, it seems that enough activity has been generated in the blogo- and twitter-spheres to have attracted at least the passing attention of well-respected bloggers such as Felix Salmon and Matt Yglesias. It's pretty clear from my analysis, however, that both of them are offering conclusions about coin seigniorage that aren't based on careful analysis of the literature that's developed on the subject.

Put simply, they don't seem to have thought things through, and they don't seem to be in a position to guide their readers in learning about the coin seigniorage option. It's good that they've recognized that coin seignorage is, at least, analytically sound enough to merit attempted refutation, and have opened the door to discussion of it in the wider discourse. Thanks to both of them for that, and especially to Matt for pointing out that involuntary solvency isn't a problem for the US. Exposure for a policy proposal is always better than just continued burial in the non-visible portion of the blogosphere. Nevertheless, it would be so much better for all of us if well-known bloggers who take up a new proposal would investigate it with care before they pronounce a verdict on it.

What harm would have been done if Felix Salmon and Matt Yglesias had just mentioned coin seigniorage and admitted that they still had to research it before deciding on whether it would work, and that they were keeping an open mind pending that research? Certainly, the potential of coin seigniorage as a solution to our revenue problem merits that kind of consideration. How important is it?

The Importance of Coin Seigniorage to the President

I'll end this post by showing how important it is through an examination of our present situation with respect to the debt ceiling and the potential obligation of the President to use coin seigniorage to cope with it.

1. Congress has appropriated Federal spending for FY 2011 which the Executive is mandated to spend.

2. These appropriations exceed the tax revenue the Government is collecting. This was expected at the time the appropriations were passed. So Congress appropriated deficit spending.

3. Congress has mandated that whenever the Government plans to deficit spend, it must first issue and sell debt instruments in an amount a least equal to the planned deficit spending. In this connection, the Treasury is prohibited from having an overdraft in its TGA at the Federal Reserve Bank.

4. Congress has mandated a debt limit such that the Administration must stop issuing debt when that limit is reached. (The limit was reached in early May). Given the Congressional requirement that deficit spending must be accompanied by debt issuance, the debt limit, in the absence of other countervailing factors puts a stop to deficit spending, until the limit is increased. There is a very important countervailing factor. But it is not recognized or used. So, for the moment, at least, the debt limit has stopped any further deficit spending

5. The 14th Amendment, section 4, requires that the validity of the “debts” (broadly construed) of the United States never be questioned, and since the President has sworn an oath to uphold the Constitution, he is obligated to do all he can to see to it that these “debts” are paid. In fact, he's obligated to see to it that these debts aren't even “questioned.” His suggestion that Social Security and other key payments won't be made on August 3, isn't living up to his obligations. Of course, he's not alone in this, since many law makers have been warning about the likelihood of a default for many months now.

6. Congress has provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. The US code also provides for the Treasury periodically sweeping the Mint's account at the Federal Reserve Bank for profits earned from coin seigniorage. These profits are then booked as miscellaneous receipts (revenue) to the Treasury and go into the TGA, narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, would close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

7. If used routinely to close the revenue gap, such coin seigniorage would eventually reduce the national debt to zero, and remove it as an issue in US politics. In addition, the existence of platinum coin seigniorage as an option, removes the tension between the mandated debt ceiling and the 14th Amendment. It is the countervailing factor I mentioned earlier, because it provides a way to spend Congressional appropriations without issuing further debt.

8. The President has sworn to uphold both the Constitution, which prohibits a default, and also the laws of the United States including the mandates just mentioned.

9. These mandates, along with the platinum proof coin seigniorage authority, make using seigniorage, or another option like it that allows the Treasury to create revenue without either taxing or borrowing, the only viable options to: continue spending appropriations without violating the debt limit; fulfill all the other mandates, both legal and constitutional; and still be able to spend the money Congress has appropriated.

10. So, if no action by Congress raising the debt limit is forthcoming, it will be the President's sworn DUTY AND OBLIGATION to either use platinum coin seigniorage, or some other revenue creating tool legislated by Congress in past years, to make the money necessary to avoid default, since his failure to use an available way of creating revenue for continuing to spend appropriations, which he is mandated to do, would be a violation of his oath of office.

So, coin seigniorage isn't some crazy idea. Instead, it is a legal instrument that the President may, depending on how things work out, have to use in a bit more than two weeks to comply with his oath of office. It may be the only way for him to avoid breaching one of the laws which he is supposed to enforce. As such, it has to be taken seriously, and treated with more than just a few dismissive conclusions, accompanied by a lack of explanation.

Many writers on the current debt ceiling crisis have been taking the view that the 14th Amendment constitutional challenge route is the best thing for the President to do if there is no agreement on the debt ceiling. In e-mail communication yesterday, beowulf offered the following opinion on why this will not work, given the existence of coin seigniorage.

. . . No federal judge -- Supreme Court justices included -- will take the extraordinary step of enjoining an Act of Congress if the President who asks them to had an opportunity to sidestep the constitutional issue lawfully but neglected to do so. . . . .

. . . The moral of the story is if the Court thinks there is no alternative to breaching the debt ceiling, it probably would find it unconstitutional (or rather, it would decline to hear the case on Standing grounds, leaving the President's decision to ignore the debt ceiling in place). On the other hand, if the Court thinks the President had a lawful alternative-- like coin seigniorage-- but neglected to use it, they're not going to bail him out.

This argument is compelling to me given the history of the Court. The Court defers to the legislature if it possibly can, and prefers the President to avoid constitutional challenges if he has a means of doing so. In this case, he does, and the means is platinum coin seigniorage.

Appendix: The Coin Seigniorage Idea in the Blogosphere

The idea of using coin seigniorage, the profits made from minting proof platinum coins, depositing them at the Fed, and receiving electronic credits in return, to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf. The first comment of beowulf's I noticed on coin seigniorage was at New Deal 2.0 http://www.newdeal20.org/2010/11/04/obama-faces-his-own-teachable-moment-25819/#comment-9831 and I mentioned his proposal in a post I did on a possible Government shutdown due to the debt ceiling a couple of weeks later. http://www.correntewire.com/constitutional_crisis_over_debt_ceiling_does_government_have_shut_down

Beowulf continued his work on the coin seigniorage proposal as the weeks went by in various comments made at blog sites such as this one at FDL. We also began to exchange messages on coin seigniorage. On January 3, 2011, he posted the seminal blog on coin seigniorage. I followed two days later, raising the question of whether President Obama would use it to forestall an attempt to use the debt ceiling to extract cuts in the social safety net or not.

These posts were noticed by Warren Mosler, one of the originators of the Modern Monetary Theory (MMT) approach to economics, who sponsored what turned out to be a wide-ranging and very high quality discussion of the coin seigniorage option at his site. Beowulf contributed extensively and very creatively to this discussion, which remains one of the most important resources on the coin seigniorage option.

Throughout the next six months, I pushed coin seigniorage in blog posts at Correntewire, FDL, and DailyKos from time-to-time and in comments at various sites. Then, in late June and July a spate of posts on seigniorage appeared beginning, I think, with wigwam's at FDL and DailyKos. He's followed up since with a number of other posts including this one with a variation on how coin seigniorage might be applied by buying $2 Trillion in debt from the Fed to create “head room” relative to the debt limit. Other important posts have appeared this month by Mahilena, DC Blogger, Cullen Roche, Scott Fullwiler, and Trader's Crucible. Accompanying the last two are extensive discussions of coin seigniorage and constitutionality of the debt ceiling with contributions from beowulf. Scott's post also received extensive discussion with beowulf contributing at Cullen's site. In addition, I've added two of my own posts, another on the President's obligation, if no agreement on the debt ceiling is forthcoming.

So, the proposal to use coin seigniorage to both comply with the debt ceiling and still spend Congressional appropriations has by now enjoyed the support of a growing number of bloggers. It has also received a great deal of discussion; receiving 246 comments at Warren Mosler's site; 206 comments spread over two post's at Cullen Roche's site, and 89 comments at Naked Capitalism. Readers checking out these discussions can see that the coin seignorage proposal has stood up very well to some very aggressive and forthright criticism.

(Cross-posted from Correntewire.com.)

Council of Economic Advisors’ Annual Reports 2005-2007: No Crisis Here

By William K. Black
* Cross-posted from Benziga

I decided to look at what President Bush’s Council of Economic Advisors (CEA) were saying in their annual reports for 2005-2007 about the massive real estate bubble, epidemic of accounting control fraud and mortgage fraud, the resultant rapidly developing financial crisis, and the great increase in economic inequality.  Here’s what I found on these topics.

CEA Annual Report for 2005

N. Gregory Mankiw chaired the CEA.

Home ownership reached a record 69%.  Home prices were surging.  No discussion of the developing bubble.  The CEA was enthused by the housing sector. 

No mention of subprime or nonprime loans (or any variants, e.g., stated income).

There was no discussion of financial institutions’ risk.

There was no mention of Fannie or Freddie.

No mention of the FBI’s September 2004 warning that there was an “epidemic” of mortgage fraud or the FBI’s prediction that the fraud would cause a financial “crisis” if it were not stopped.  No mention of mortgage fraud.

The report contained an extensive discussion of Internet frauds.

No use of the term “inequality,” but discussion of some of the factors increasing inequality.  It does not discuss the perverse incentives arising from executive compensation tied to short-term reported firm income.  

MMP BLOG #7: WHAT BACKS UP CURRENCY, AND WHY WOULD ANYONE ACCEPT IT?

Last week we introduced the concept of a sovereign currency. When I first started teaching, most students thought the US Dollar had gold backing—that it was valuable because Fort Knox was filled with gold, and if they drove to the Fort with a stash of cash, they could load up their car trunks with gold. (They were shocked to find out there had not been any gold backing since they were babies.) Today, very few students entertain such beliefs—they have all learned that our currency is “fiat”—it has “nothing” backing it up. Well, maybe “something”—but we don’t necessarily want to see what is behind Alan Greenspan’s “curtain”:

So, this week, let us take a peek behind the currency. Is there anything there, other than the Fed Chairman’s—how shall we put it—family jewels?

What “backs up” domestic currency? There is, and historically has been, some confusion surrounding sovereign currency. For example, many policy makers and economists have had trouble understanding why the private sector would accept currency issued by government as it makes purchases.

Some have argued that it is necessary to “back up” a currency with a precious metal in order to ensure acceptance in payment. Historically, governments have sometimes maintained a reserve of gold or silver (or both) against domestic currency. It was thought that if the population could always return currency to the government to obtain precious metal instead, then currency would be accepted because it would be thought to be “as good as gold”. Sometimes the currency, itself, would contain precious metal—as in the case of gold coins. In the US, the Treasury did maintain gold reserves, in an amount equal to 25% of the value of the issued currency, through the 1960s (interestingly, American citizens were not allowed to trade currency for gold; only foreign holders of US currency could do so).

However, the US and most nations have long since abandoned this practice. And even with no gold backing, the US currency is still in high demand all over the world, so the view that currency needs precious metal backing is erroneous. We have moved on to what is called “fiat currency”—one that is not backed by reserves of precious metals. While some countries do explicitly back their currencies with reserves of a foreign currency (for example, a currency board arrangement in which the domestic currency is converted on demand at a specified exchange rate for US Dollars or some other currency), most governments issue a currency that is not “backed by” foreign currencies. In any case, we need to explain why a currency like the US Dollar can circulate without such “backing”.

Legal tender laws. One explanation that has been offered to explain acceptability of government “fiat” currency (that has no explicit promise to convert to gold or foreign currency) is legal tender laws. Historically, sovereign governments have enacted legislation requiring their currencies to be accepted in domestic payments. Indeed, paper currency issued in the US proclaims “this note is legal tender for all debts, public and private”; Canadian notes say “this note is legal tender”; and Australian paper currency reads “This Australian note is legal tender throughout Australia and its territories.” By contrast, the paper currency of the UK simply says “I promise to pay the bearer on demand the sum of five pounds” (in the case of the five pound note). And the Euro paper currency makes no promises and has no legal tender laws requiring its use.

Further, throughout history there are many examples of governments that passed legal tender laws, but still could not create a demand for their currencies—which were not accepted in private payments, and sometimes even rejected in payment to government. (In some cases, the penalty for refusing to accept a king’s coin included the burning of a red hot coin into the forehead of the recalcitrant—indicating that without such extraordinary compulsion, the population refused to accept the sovereign’s currency.) Hence, there are currencies that readily circulate without any legal tender laws (such as the Euro) as well as currencies that were shunned even with legal tender laws. Further, as we know, the US Dollar circulates in a large number of countries in which it is not legal tender (and even in countries where its use is discouraged and perhaps even outlawed by the authorities). We conclude that legal tender laws, alone, cannot explain this.

If “modern money” is mostly not backed by foreign currency, and if it is accepted even without legal tender laws mandating its use, why is it accepted? It seems to be quite a puzzle. The typical answer provided in textbooks is that you will accept your national currency because you know others will accept it. In other words, it is accepted because it is accepted. The typical explanation thus relies on an “infinite regress”: John accepts it because he thinks Mary will accept it, and she accepts it because she thinks Walmart will probably take it. What a thin reed on which to hang monetary theory!

Personally, I’d be embarrassed to write that in my own textbook, or to try to convince a sceptical student that the only thing backing money is the “greater fool” or “hot potato” theory of money: I accept a dollar bill because I think I can pass it along to some dupe or dope.

Now, that is certainly true of counterfeit currency: I would take it only on the expectation that I could surreptitiously pass it along.

But I’m certainly not going to try to convince readers of this Primer of such a silly theory. Next week: a more convincing argument. See if you can anticipate the answer.

Like a good Mexican soap opera, we need to leave you hanging. I know many readers already know the answer, and you’ve got your hands high in the air, saying “call on me, I know the Butler did it”.

But remember that this is a Primer and not all of your classmates know the answer (yet). So, please don’t give away the plot line. In the comments, let us stick to the “gold standard” vs “fiat money” or “legal tender” and “hot potato” theories of money. I am sure we’ve got at least a few “goldbugs” out there. You probably cheered when Ron Paul asked Bernanke whether gold was money. Is gold money? Can it be money? If gold no longer backs money, why does the Fed hold it? Could a currency be backed by nothing more than “trust”—the expectation that someone, somewhere, will take it?

Have fun pondering.

We Can Still Do Big Things

By Mitch Green

President Obama is fond of reminding us that, as Americans, we can still do “big things.” Indeed we can do big things, but will we? At a passing glance, in a moment's earshot, the President's sentiment seems encouraging. That is, until you appreciate the extent to which he has committed himself to applying that rhetorical device to the task of large-scale deficit reduction. To those left sane after watching the debt ceiling theatrics, or those lucky few immune to the mind numbing aspects of it all are scratching their heads wondering why on earth the President has chosen this task as his “big thing,” rest assured you are not alone. Perhaps the President has read Fight Club too many times and believes that pushing the US economy to the brink of self-destruction is a good thing. While it's a good book, and far from Palahniuk's best work, I'd remind the president that it wasn't supposed to be taken literally. Whatever his reasons, I think there are better “big things” out there that we might set out to achieve. Other things that actually improve the conditions of our lives, not roll them back.

SOVEREIGN CURRENCY, MEDIUM OF EXCHANGE, AND SECTORAL BALANCES: Response to Comments on MMP Blog #6

Thanks for comments. As you may have noticed, I kept the blog shorter this week so that we could focus on a smaller range of topics. That seems to have helped—the comments this week are also well-focused. I think I can hit the main concerns by addressing three topics.

1. 
   Relation between the sovereign currency and the medium of exchange: We first introduced the money of account: the Dollar in the US and the Pound in the UK. This is a unit of account, a measuring unit like the “inch”, “foot” and “yard”. It does not exist even as an electronic entry; not even a bloodhound could sniff it out. It is representational, something only a human could imagine. Next we introduced the concept of “money things”—denominated in the money of account. (Similarly, our unit used to measure length cannot be sniffed by dog, but it does have physical things that can be sniffed and measured: the inch worm is an inch in length, my foot is a foot—more or less, and the football field is 100 times the distance from Henry the first’s nose to thumb. Probably more, actually, as we know those kings exaggerated the size of their anatomical features, like rap stars today.) This can include paper, notes, and electronic entries. We’ll say a lot more about the nature of those things that get measured by the money of account. This week we introduced the sovereign currency—the national money of account adopted by a sovereign government. While a money of account could—in theory—be created and adopted by private entities, the sovereign currency is adopted by the sovereign government; and the sovereign currency is usually at least the primary money of account if not the only money of account used within a sovereign nation.
   
   The word “currency” is frequently used to designate not only the money of account adopted by sovereign government, but also to designate a money thing issued by the sovereign government and denominated in the money of account. In the US it is the coin issued by the Treasury and the note issued by the Fed. In other words, we use the term “Dollar” to indicate both the sovereign currency (money of account) and the money thing (paper note or coin) issued by the US government. We have not yet got to the “medium of exchange”. Most textbooks begin with the medium of exchange (Crusoe and Friday look about for handy sea shells to function as convenient media of exchange). I reject that story and purposely wait to introduce the concept. But to jump ahead a bit, yes the “money thing” currency issued by government generally functions as a medium of exchange. Other privately issued money things also frequently function as media of exchange. That is a function of money things, and really does not help us to understand much about the nature of money. When you walk into a relatively new diner or any other “mom and pop” firm, there usually is a frame hanging on the wall, with a Dollar bill and some sort of statement like “the first dollar we ever earned”. Here, money functions as a memento—reflecting the pride of the owner of the establishment. Two decades ago, there were lots of stories of Wall Street traders using hundred Dollar bills functioning as cocaine delivery devices. I don’t think it is useful to put undue emphasis on the various functions of money. Let us at least first try to understand its nature.
   
2. 
   That leads us to the question about “bank money”. Again, we will get into this in detail in coming weeks. However, to break the suspense, banks (and other institutions as well as individuals) can issue IOUs denominated in the money of account. We do not call these “currency”. They are not issued by sovereign government. They are “money things”. Yes, some are more “special” than others: the IOU of the Bank of America (a private bank—not Uncle Sam’s bank) is more “special” than the IOU that you issue. Yes, it can function as a medium of exchange. The reasons for the “specialness” will be examined later. But an obvious one is that to some degree Uncle Sam stands behind BofA—for example, he guarantees demand deposits (your checking account).
   
   So, yes I do understand the worry that Uncle Sam has essentially licensed BofA to “counterfeit” Dollars—if the bank goes bust, Uncle Sam will pay out nice new Dollar bills to depositors. This raises many issues of concern, and some of those are directly relevant to the global financial crisis we are going through—in which Uncle Sam has effectively done just that. But for right now, that really would take us too far afield. Please be patient.
   
3. 
   Currencies and balances. Recall that we have discussed (briefly) unsold inventories. Suppose it is the end of the year 1974 and we are Ford motor company and we produce 1000 Ford Pintos (remember those—the ones with exploding gas tanks?) that we cannot sell. Unsold inventory gets counted as investment. Ford carries the inventory at its market price—let us say, the average price of Pintos that it actually did sell in 1974. Assume it cannot sell them in 1975, either (deep recession, bad publicity about the tanks, and so on). How to value them? All things equal, Ford would prefer not to book a loss of value—it carries them at original value, otherwise, the value of its inventory declines impacting 1975 profits and net worth. Now in 2011 it is still carrying those Pintos in inventory. You see the problem. We have to assign a dollar value to them.
   
   Now let’s address the problem of dual currencies. Suppose Ford produces cars in America but sells them in America and Japan. It imports all the electronic components from Japan. It can keep two sets of books—one for Dollars and one for Yen. It has income and outgo in each currency. Clearly it could run a deficit in one and a surplus in the other (or surpluses in both, or deficits in both, etc—you get the picture). All other firms, households, and levels of government can do the same in Dollars and Yen. Adding up all the sectors, we get to our three balances in each of the currencies. But Ford’s shareholders do not want to know that it has a surplus in Dollars of 1 billion and a deficit in Yen of 1 trillion—it wants the overall balance for Ford’s income. Just as we have to convert Pintos to Dollars, we have to convert those Yen to Dollars. We need an exchange rate. Yen and Dollars float—changing every day in relative value. It is going to make a huge difference what exchange rate we use.
   
   So, yes I am sympathetic to “Tobinesque’s” comments. The cleanest way is to keep the accounts separate and there will be sectoral balances in each currency that do balance. But, yes, a government as well as a firm needs a budget in one currency (generally it is going to be the domestic currency) and so if income and outgo occur in more than one, exchange rates must be used to get everything into that currency of denomination. This is true even if the government/firm/household actually has bank accounts denominated in the foreign currency. This complicates matters because now the sectoral balances will not balance (exactly) unless everyone uses the same exchange rate all the time—which would happen if we pegged.
   
   This issue has come up before—there are variations in estimates of the three balances. One reader pointed out that one of the graphs I used showing—say—the private deficit during the Clinton years differed a bit from a later one I showed here on the MMP. The reason was due to updated data and different sources (the older one came from Wynne Godley and the later one from Scott Fullwiler). As they say, economics is not an exact science!
   
   More seriously, you should not think that aggregate economic data like GDP or the CPI (consumer price index), or the sectoral balance are measured precisely. These are estimates, using data that is constructed. What is important is consistency. I know this always shocks students the first time they hear it. But the CPI does not come from heaven. It is constructed, it is revised, and it is subject to great debate among wonky people with thick glasses. And believe it or not, it does matter exactly how these data are constructed. But do not get misled by that. Certainly at the level of logic, the three balances do balance. If we could measure things exactly, they would balance in practice. Knowing that they should balance, the statistician who puts them together ensures they do balance—by construction. This is not easy; a “statistical discrepancy” is added to ensure they do—and if you need a big one of those, that is not good. And, yes, dealing with valuing those inventories is a big headache—I can remember when Wynne Godley used to fret over that, and I didn’t understand why. Now I do.
   

Pinch-Hitting For Peterson, Responses

By L. Randall Wray

It is perhaps a bit unseemly for the protagonist to be the first to answer Stephanie Kelton’s call for responses. However, I wanted to address two comments received to the series.

First, from GLH there was a question about the term “beltway progressive”. Fair enough. Comes from “inside the beltway” of Washington DC. Many “think tanks” (a misnomer as few think tanks actually do any thinking—most simply push an ideological agenda) locate within the beltway to have easy access to politicians, policy-makers, lobbyists, media, and funding. Most of these are center-right, or crazy right, but there are a few progressive think tanks slugging it out. I did not use the term in a derogatory manner, although I did criticize the “group think” on debts and deficits that emerges from within the beltway.

Locating within the beltway does provide many advantages. When media types are working on a story, they want to go where the action is—and that is usually Washington. The media loves to report on politics—as opposed to, say, economics—because everyone has an opinion and all opinions are seemingly more-or-less equal. It is easy to get a debate about the significance of the most insignificant political poll; it is easy to get some instant expert weighing in on what “the American people” want, and what any particular election “really means”. Occasionally they will cover economics, usually some proposed legislation that will benefit really rich people. Think tanks offer a veil of respectability that registered lobbyists cannot provide. It is hard for a policy-maker to directly affirm that he’s supporting a piece of legislation that benefits—let us say—some blood-sucking vampire squid because that firm’s lobbyists have promised campaign contributions. So it is much better to turn to a think tank that takes vampire squid money to produce “research” reports advocating policy that will benefit vampire squids. So that is the main role of beltway think tanks.

And that is, to me, what is so problematic about beltway progressives adopting the Pete Peterson approach to deficits, debt ratios, unfunded entitlements, and fiscal responsibility. As I have argued, that adoption is probably a “coincidence” in the sense that progressives in Washington are merely sucking the same air. It is “within the beltway” thinking. And within that beltway there is no longer any room for disagreement about “unsustainable” deficits and debt.

I know this from personal experience. It is much harder to influence policy from Kansas City or from upstate NY (the Levy Economics Institute). Yes, reporters occasionally decide: “hey maybe we should get an economist who is not connected to the beltway think tanks; maybe one of those farm country hillbillies in the Midwest. How about Kansas?” (UMKC, by the way, is in Missouri, and we are quite a distance from the Ozarks--but the confusion about Midwest geography probably helps us.) So we get our airtime. Occasionally I venture inside the beltway and meet with policymakers, politicians, heads of civil rights or labor groups, and so on. When I say that government solvency is not at issue, they look at me like I’ve just sprouted two horns. They call for the guards to escort me out. They warn me not to come back until I’ve got a letter signed by Joe Blow from XYZ progressive think-tank from within the beltway endorsing my proposal. I am not kidding, but I won’t name names. (Sometimes it is even worse—they’ll say: “Oh you are one of those economists that Paul Krugman attacked because you claim deficits never matter. Don’t come back.”) Therefore, not only is the endorsement by beltway progressives of the Peterson view limiting the range of debate within the beltway, it also closes off the beltway to any progressive alternative outside the beltway.

Second, for Craig Austin. Yes, I know we are terrible writers and promoters and don’t know a thing about PR. And yet, you are here, along with 2500+ readers every day to read what we write. A half dozen of us created the MMT that you now love dearly—those of us here at UMKC plus Warren Mosler, Bill Mitchell, and Scott Fullwiler. So we are not complete failures. We want you and others to take up the fight. If you are better at marketing, great, do it. If you want to self-promote your own blog, go for it.

But if you are here to get funding from us, you are delusional. There is no money.

Let me explain how things work at NEP. It was Stephanie Kelton’s brainchild; she bought a URL out of her pocket change, roped a couple of UMKC profs to donate time, got some of our associates to donate their time (Marshall, Scott), and started the blog. Frankly, I was skeptical. I barely even knew what a blog was (I knew Bill Mitchell had one but wasn’t quite sure if it was a disease or other affliction). She learned how to set up the blog, and then got some volunteer techie assistance from our grad students. There is no revenue; if there are expenses, Stephanie covers them out of pocket. And she and her techie grad students post every blog that is put up because the rest of us are too damned incompetent to learn how to do it. We can barely distinguish a URL from a URINAL.

So if you want money out of UMKC, here is what you need to do. Apply to our PhD program; get accepted; and if you are among the top applicants you might be awarded a stipend. For the princely sum of $10,000 per year, you attend lectures and study for 40+ hours a week. You also must work as a slave (whoops, we now call them GTAs—graduate teaching assistants) assigned to a prof for 20 hours per week, grading papers, leading discussions, holding office hours, and later teaching your own class. And then if we discover you know anything about computers, you get to donate your time at night to helping on the NEP.

So if you wonder why we do not have a PR firm, it is because we have not yet found one to work for free.

Barack Obama: America's First Tea Party President

By Marshall Auerback

For all his talk of the importance of averting a debt default, Barack Obama.is increasingly signaling that major deficit reduction has become more than just a bargaining chip to bring Republicans aboard on a debt deal. He actually believes that cutting entitlements and reducing the deficit are laudable goals, which would mark “transformational” moments in his President. Let’s face it: the man is not a progressive in any sense of the word; he’s a Tea Party President through and through.

To be sure, it’s tough to make the case that the Tea Party has anything like a genuinely coherent political platform. They hate entitlements, but one of their leading voices in the Senate, Rand Paul, conspicuously avoided any talk of cutting Medicare during his campaign (unsurprising, given how much of his income as an ophthalmologist involved treating Medicare patients). They also have a Presidential candidate, Michelle Bachmann, pledging never to raise the debt ceiling, yet proposing to slash the federal corporate income tax and eliminate the capital gains and estate taxes.

But for the most part, a common thread amongst the Tea Party is a visceral dislike of “excessive” government spending. Virtually all buy into the notion that the federal debt levels are “unsustainable” and that entitlements, really need to be “reformed” (i.e. cut back). In that regard, their aspirations appear to be more in line with the President, than their ostensible GOP allies, one of whom is, Senator Mitch McConnell. The Senate Minority Leader has proposed giving President Obama the power to raise the debt limit on his own through the end of his first term, but to force Democrats to take a series of votes on the debt limit in the months leading up to the election. This would stave off the threat of defaulting on national obligations, but would make the President politically responsible for all subsequent spending cuts and/or tax increases.

On the surface, this would seem to be a great deal for President Obama. He could in theory simply take up Senator McConnell’s offer, raise the debt ceiling and avoid the self-inflicted insanity of draining $4 trillion of aggregate demand from an economy still reeling from massive underemployment and wasted resources. Or the President could, as we and others have suggested in the past, simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.

Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here). Curiously, the President won’t pursue any of these options. What’s the problem?

If, for example, the President genuinely believes that the 14th Amendment does not give him the right to ignore the debt ceiling, he has been loath to give any reasoning for this publicly. Why not? He is, after all, a constitutional law professor. Yet, much like the single payer option during the health care debate, the President refuses to put the legal argument on the table, even as a negotiating posture. Is it caution, or does the President genuinely believe this guff about the deficit?

By the same token, the President might well dismiss Scott Fullwiler’s idea as nothing more than a “gimmick”. But if the alternative is something which (in the words of Mr Geithner), could create “catastrophic damage across the American economy and across the global economy”, then why not deploy this “gimmick” to avert a default?

After all, as Bill Mitchell has pointed out:

"[T]he whole edifice surrounding government spending and bond-issuance is also ‘just an accounting gimmick’. The mainstream make much of what they call the government budget constraint as if it is an a priori financial constraint when in fact it is just an accounting statement of the monetary operations surrounding government spending and taxation and debt-issuance.

There are political gimmicks too that lead to the US government issuing debt to match their net public spending. These just hide the fact that in terms of the intrinsic characteristics of the monetary system the US government is never revenue constrained because it is the monopoly issuer of the currency. Which makes the whole debt ceiling debate a political and accounting gimmick."

The fact is that when a President really wants to spend money, he can almost always find a way to do so. During the Clinton Administration, Treasury Secretary Rubin and Deputy Treasury Secretary Summers did an end-around Congress (which was seeking to prevent the use of government money as support for a bailout of Mexico – or more accurately, a bailout for Wall Street banks which had foolishly lost money investing in Mexico) through the deployment of the little known “Exchange Stabilization Fund”.

Until then, the ESF had been an obscure entity, the Treasury’s own honey pot, established by a long-forgotten provision in the Gold Reserve Act of January 31, 1934 for the purpose of stabilizing the exchange value of the dollar. The ESF was certainly not created simply to help the President go around the backs of Congress. Yet the President did it and in effect called the GOP’s bluff (and, for the record, the Republicans never went to the courts to challenge the decision; they waited for the far more important event of the President having sexual relations in the White House with Monica Lewinsky before going the legal route).

To be sure, one can argue that Mr. Clinton was serving his patrons on Wall Street, when he performed this action. But whatever the motivations underlying the use of the ESF, it made clear that Bill Clinton wanted to spend government money and got his Administration to find ways around the opposition of Congress. Call it a gimmick, but however questionable the motives underlying the action, it showed a President prepared to fight for what he thought was an important objective. Clinton certainly didn’t try to jump ahead of Congress on this issue. He fought them. Arguably, it set the stage for the more aggressive fight to keep the US from defaulting in 1995, during which the Gingrich-led Congress sought to shut down the government by initially refusing to sanction an increase in the debt ceiling.

By contrast, this President has apparently fallen in love with the idea of being the biggest deficit hawk in Washington, DC. In fact, last Sunday, the White House chief of staff, William M. Daley, said on "This Week" on ABC that Mr. Obama would continue to push for a major deal to reduce the deficit. "Everyone agrees that a number around $4 trillion is the number that will make a serious dent in our deficit," Mr. Daley said. "He didn't come to this town to do little things. He came to do big things."

"Big things" - like destroying the New Deal and what's left of The Great Society. Who knew this is what Obama meant when he said he wanted to be a "transformational President" like Ronald Reagan? He’s gone a lot further than Reagan dared to contemplate on the issue of entitlement cuts. President Obama actually believes this poisonous nonsense about the US on the verge of becoming “the next Greece”. This was confirmed yesterday by Press Secretary Jay Carney, who said of McConnell's proposal that it was not the President’s "preferred option."  McConnell's proposal for avoiding debt default -- to transfer full power to raise the debt ceiling to the White House for the remainder of Obama's current term, cutting Congress out of the process -- does nothing to address deficit reduction, Carney said. And Obama is set on making sizable cuts.

Yet again, the President shows profound confusion on the issue of the deficit. He fails to understand that if private spending is lagging then public spending has to fill the gap. Otherwise output and employment growth will be sluggish if not negative. To cut into the huge pool of unemployed and underemployed labor, employment growth has to be faster than labor force growth, which means that real GDP growth has to be faster than the sum of labor force and labor productivity growth.

These facts are very simple and indisputable. Cutting public spending at this juncture is the last thing the US government should be doing. Yet this President is pushing for the largest possible cuts that he can on the Federal government debt. He is out-Hoovering the GOP on this issue. He is providing “leadership” of the sort which is infuriating his base, but should endear him to the Tea Party. This is “the big thing” for Barack Obama, as opposed to maximizing the potential of his fellow Americans by seeking to eliminate the scourge of unemployment. Instead, his big idea is to become the president who did what George Bush could not, or did not, dare to do: cut Medicare, Medicaid and Social Security. What more could the Tea Party possibly want?