This is Part IV of my reply to Philip Wallach’s reply to my evaluation of his views on the platinum coin proposal and other options for settling debt ceiling conflicts. In Part I I discussed some preliminary mis-characterizations of what I said and, more importantly, why the commonly recognized fiscal policy rule that, at least over a number of years, government revenues ought to match government spending is fiscally unsustainable and fiscally irresponsible in light of deductions from the Sectoral Financial Balances (SFB) model.
In Part II I continued with a discussion of political legitimacy and usurpation issues and then covered some legal objections to using the $100 T platinum coin option related to the “intent” of the coin law. In Part III I discussed a legal objection based on Wallach’s view of the intent of the coin law, which quickly morphed into a political objection about the desirability of mutual respect and comity among the three branches of government, as well as the threat to political legitimacy arising from the judgment that the platinum coin option is really “weird.”
In this, Part IV, I’ll continue discussing the “weirdness” objection, and also cover Wallach’s views on Inflation and hyper-inflation, and Modern Money Theory.
More on Weirdness
Wallach again brings Mike Castle to the argument:
. . . Former Representative Mike Castle (R-DE), who played the biggest role in putting the platinum coin law on the books, nicely summed up what the reaction would be likely to be back in 2013. He said the plan is “so far-fetched and so black helicopter-ish a type of methodology of trying to resolve something like this that I think the public would totally scoff at it…It would be an artificial way of trying to create money and I think everybody will see that.”
I’ve already commented, in Part II,
on Mike Castle and Phil Diehl and their different recollections about the purpose of the law. Here I only want to say that Mike Castle has no special expertise about whether people would see the platinum coin as an “artificial way of trying to create money.” So, his view of what people think is just another opinion, even if his opinion on the intent of the law is more than that, because he was the sponsor of the platinum coin Act.
Now, public scoffing is unlikely to persuade Firestone, since he sees widely held commonsense ideas about public finance and money as totally wrongheaded and wants to completely repudiate the idea of a budget-constrained government. And I have to be careful here, because I, too, want to reject a widely held intuition about public finance—namely, the idea that we should take a courageous stand against debt by refusing to raise the debt ceiling, an incoherent idea that is nevertheless supported by a wide swathe of the public. But even so, I have to say that Firestone’s idea for a Treasury-led transformation of our monetary system strikes me as deeply undemocratic.
First, I do care about public scoffing about my idea. I just don’t care about whether people invested in the Washington/New York mainstream of punditry or commentary scoff at it or not. Why not? Because, mainstream people scoff at everything that involves a significant change in the present system. Doesn’t matter what it is.
The first reaction to anything that may bring change is to ignore it and hope it will go away, The second, if that doesn’t work, is scoffing; followed by proposals of wonky, incremental solutions to current problems that have never solved anything important in the past 25 years.
Note to Washington/New York columnists and think-tankers: crying “weird” or “ridiculous” all the time, is like crying “wolf” all the time. If you do that then people fail to take what you say seriously.
Second, I do not repudiate the idea of a budget-constrained government. The Government must be constrained by a budget passed by the Congress. And they ought to constrain their budget to fiscal policies and programs that produce net benefit for public purpose for the United States.
I explain what that means in detail in two recent e-books, here and here. But, partly, it means that there are budget constraints, and among them will be the standard of providing for price stability. This means that the full complement of one’s policies must not result in inflation and that when it starts to appear there must be programs in place that can immediately kick in automatic stabilizers to stop it.
However, budget constraints ought not to be about following rules such as balancing the budget, or lowering the debt-to-GDP ratio, which are applied outside the framework of net benefit for public purpose and had their origin in the economics of gold standard America. Rules like those may have been appropriate then, because solvency concerns were appropriate when we would run out of gold, but they do not apply, and they are part of a fuller panopoly of deficit myths which we will hear about more and more as the 2016 campaign wears on.
Third, I do not believe that common sense ideas are always and everywhere wrong. But I do believe that it is very hard to say what is “common sense” and what is not, and I also believe that “common sense” varies greatly across groups, and that what is viewed as “common sense” by Washington mainstreamers is not what most people view as “common sense,” nor is it likely to be particularly valid, considering the number of occasions on which their opinions are just way off base.
Fourth, I also believe that anyone’s “common sense” needs to be critiqued and otherwise tested before it forms the basis of public policy. But “scoffing” “labeling”, and “name-calling,” are not reasoned critique, and are no substitute for it.
And fifth, why does Wallach view the minting of $100 T platinum coin as an undemocratic Treasury-led transformation of our monetary system? The coin law was duly passed in 1996 and never has been repealed. The President is the only office holder who can claim to have been elected by anything resembling “all of the people,” and the coin would only be minted after he gave an order to the Secretary, who, in turn, would order the coin from the Mint. The Fed would still be there, the three branches of Government would still be there, Treasury spending and taxing would still be mandated by the Congress.
The only things that would change are that 1) the debt ceiling law, while still in place, would be a dead letter and Congress would have to rely strictly on its budgetary processes to guide spending; 2) All Treasury debt instruments subject to the limit would eventually be extinguished over a 30 year period; 3) the Treasury would issue no more interest-bearing debt instruments except for special purposes; and 4) the private sector and foreign nations would not be able to use Treasury debt instruments as a risk free investment, and would have to seek Interest on Reserves (IOR) from the Fed, instead. So, in fact the transformation would be Presidency-led using the authority of Congress granted in the 1996 law to save the economic system, and would not be a radical transformation of the system in any case, unless you consider the sharp curtailment or elimination of debt instrument issuance a radical change that the American public would not favor.
In short, I think all of these changes would benefit public finance in the United States, and that none would really harm either it or the private sector, so I would appreciate it, if Philip Wallach could explain how and why this would be some profound change in the monetary system, or the system of public finance.
Minting the $100 T Coin would Bring Inflation or Hyperinflation
Wallach brings in inflation:
As if to prove just how far-reaching a change the platinum coin maneuver is meant to effect, Firestone tells us that “if the President is wise” he will push not just for a measly $1 trillion coin, but rather for a $100 trillion coin, which would effectively declare the debt ceiling null and void for the foreseeable future. By Firestone’s lights, this move would not be at all inflationary, since that money would never circulate and could be used to support government spending only to the extent that Congress was willing to appropriate money.
The $100 T coin is meant to do two things: first, prevent Republicans from repealing the coin law, and re-instating the debt ceiling as a coercive tool of budget negotiations for the purpose of repealing the debt ceiling; and second, to produce a compelling fact on the ground, known by all, refuting the contention that spending by the Government must be constrained because of the inability of the Government to afford it. I don’t want this fact on the ground because I am an enemy of budget constraints. I’m all for such constraints, when they are based on assessment of the likely effects of public policy relative to public purpose, including their possible negative impacts on price stability. But, I am unalterably opposed to such constraints, when they are based on the debt/deficit
myths that assert that we cannot afford to enact fiscal policy that would benefit people.
Right now, all the budgets introduced into the Congress, even the budget outlines proposed by the Congressional Progressive Caucus (CPC) are all based on such myths. They govern our political system and our Congress. I want to rid ourselves of them. Where does Philip Wallach stand?
That seems…extremely dubious. The idea that we would simply move some numbers around in some electronic ledgers and emerge less constrained by our debt, but without any consequences for the value of our currency does not compute, at least for me—it is a story about price inflation that never once mentions expectations. How could we enter a world in which government debt accumulation would have no negative consequences (for taxes or otherwise), but Congress would nevertheless refrain from spending money in an inflationary way?
I’m sorry Wallach doesn’t understand this. Perhaps I can help. The $100 T platinum coin is deposited in the Mint’s Public Enterprise Fund (PEF) fund account. The New York Fed credits the PEF with $100 T in reserves. The seigniorage, as prescribed by law, is transferred into the Treasury spending account at the New York Fed. The Treasury only uses the balance to pay down debt and pay for deficit spending over many years. The debt repayment occurs as prescribed by law when the debts fall due. The deficit spending also occurs when Congress mandates such spending by the Treasury.
The only thing that’s different is that the Fed doesn’t have to sell debt instruments at auctions any more in order to both roll over debt or deficit spend. Also, of course, as a consequence of this, since the Government is paying down and eventually paying off the debt; debt accumulation, contrary to Wallach’s statement above, would end. (Wonder why Wallach didn’t see that?)
If there is any inflationary impact in that beyond what exists in our present practices, then perhaps Wallach can explain where it would come from? If there is any at all then it will come from Congress passing bad fiscal policy that creates demand-pull inflation. It will not come from the fact that spending is financed by reserves gotten from taxes and minting coins rather than from reserves gotten from debt auctions.
Now, Wallach says that there’s nothing in this story that takes account of expectations. But why does he say that? I am not saying that expectations won’t be a factor in the development of inflation, if it begins to occur. In fact, I’m sure they will be if demand-pull inflation from too much deficit spending begins to occur.
But, that won't happen due to the expectations fairy alone. It needs a causal mechanism from minting to expectations to inflation. Where is that causal mechanism?
It is the role of Congress to pass laws designed to cope with such inflation, and the role of the Federal Reserve too, to do what it can with monetary policy. So, if inflation does occur it will be due to primarily to Congress’s policies and to Fed actions, not to having a full public purse, rather than an empty one.
But I do not see what all this has to do with minting the $100 T coin, to kill the government solvency/insolvency myths and the fiscal sustainability myth that have been crippling our efforts at getting to full employment, full recovery, and a truly healthy economy that serves all of us. Expectations play a role in our economy now. I think they tend to depress the economy and carry with them a bias toward stagnation, and that is why we have had a stagnant economy since the last big credit bubble burst with ruinous result. It would be a good thing to adjust those expectations, and if minting the coin will do that, then I think it will be to the good.
Modern Money Theory
Wallach next talks about the understanding of myself and others who have written about the MMT approach to economics. He says:
Firestone and his colleagues have a correct and unusual understanding of the fact that money is a social construct. That makes their writings genuinely interesting to work through, unsettling in the best sense, because they are willing to imagine how radically different monetary systems might serve social purposes. But they seem to have little sense of how being a consensual social construct makes money a particularly delicate, even fragile, social convention. Instead, they have the sense that they can boldly manipulate the parameters of the system with great positive effects and no important backlash. They would confidently lead the public through the looking glass into a brave new monetary world, and are certain that we would all be better off for the change (with the possible exception of some privileged few well served by the current system—there is a pronounced populist edge to all of these writings, which assume the only apple carts upset by their monetary revolution-in-the-making would be those of the very wealthy).
Most of us do have a bit of a populist edge. But if that means that we are about serving democracy and the public purpose, then I think that is the truth. On our understanding of money, however, I think that we, more than most, understand that money is an abstract, social construct, a tool to be used for public benefit, as the founders of the United States intended. But we doubt that it is that fragile a social construct when it is based on the legitimacy of the Government of a highly productive nation sharing its prosperity among its citizens. The United States still is that to a great degree, though following policies that lead to economic stagnation will erode that and paradoxically also lead to the very inflationary conditions Wallach fears.
In any event, MMT writers like myself, don’t want money and the workings of our banking system to remain mystified, and the object of continuous mystification and myth making. We want people to know the truth about their money, because we don’t believe in noble lies. We morally reject them. And we think that if the people know the truth about money, then their representatives in Congress will do a better job of representing them, and delivering full employment, price stability, economic growth, and solutions to the variety of problems of our society that would benefit from government financing.
It is true of course that neither we nor anyone else can say what the side effects of people knowing the truth will be. And we cannot say that we have anticipated every possible side effect, or even serious “black swan” effects that may be-devil us. But what we do know is that the present system doesn’t work for most people.
It needs to change and it needs to change quickly. We won’t be able to make needed changes without removing some of the barriers to change that have grown to protect the economic status quo in our system over a number of generations. We think that the truth about money can be a great engine of positive change.
So, like progressives of the past we look to the future with more hope than fear. We want to exercise due caution, but we also want to make change and cease sitting with our arms wrapped around our bodies in fear of any change to our present system. Conservatism is the disposition to protect the good things from the past against the negative impacts of change. This is reasonable when what the past has produced is delivering for most of the people. But when the current system is not working for them, and when it is slowly boiling them as the proverbial frogs, then I think we have to be more concerned about the possibilities of innovation and less interested in protecting the past.
It is a matter of adjusting to the times, when times are bad, then clinging to conservatism is clinging to human suffering that most often is not being visited upon those who are doing the clinging. How about the 20 million who still want full time jobs that can’t find them? How about the people who either can’t afford Obamacare, or who can’t afford to use it even if they have it, or who are becoming bankrupt due to its co-pays and deductibles and low levels of coverage? How about the people who are student loan debt victims? How about the people who have inadequate food support?
Well, all of you get the idea. The economic stagnation produced by the neoliberal consensus in American politics is not something I intend to tolerate. So I advocate change, and among the most important changes we could make is in the dominant story about government solvency. If we get out the truth of that, then I think we can change much, and one key to that is the platinum coin.
So, Wallach is clearly worried about the possible side effects of the changes I propose, but he can’t quite put his finger on a line of reasoning that will show exactly what is wrong with my thinking and with the thinking of others who agree with me about deficit myths. So, he conjures up the fears of the past: illegitimacy, loss of faith in the government, hyper-inflation, de-evaluation of the currency, chaos just beyond the horizon. The classic fears of the conservative thinker, embodied in Weimar Germany as one of the paradigm cases.
But this paradigm case is not analogous to us using the platinum coin to create another Weimar on the Potomac. The reasons why are given in my books linked above. Suffice it to say here, that Weimar Germany wasn’t a fiat money sovereign. We are, and because we are it is hard to de-value our currency without excessive government spending into the economy.
But for better or for worse—I think better—our democracy doesn’t function that way. To say the public is not ready or willing to step through that looking glass would be an understatement; few people would even be able to comprehend the practicalities of the new regime, and most would immediately and decisively reject the change as illegitimate. America, and I think any representative democracy, is more little-c conservative than this. Firestone throws around that word as an epithet for cowardliness; to my ear, it sounds like a valuable safeguard against foolhardiness.
I’ve already addressed the question
of whether the public would find a President using the $100 T platinum coin option “weird,” so please refer to that reply again. On the practicalities of what Wallach calls the new regime, I think that people would not find them very different from today. The Government would be paying off the debt. That is different, but that is what a majority of people want the Government to do, as long as it doesn’t cut spending or raise taxes at the same time. So, I think people would easily accept that.
Other than that, the Congress would be going through its normal budgetary processes and appropriating its spending, which the Executive would have to implement. People would see that. They wouldn’t see Treasury auctions any more, but then again, most people don’t get involved with that anyway. The Fed would still be doing monetary policy. Everyone would still have and use their banks.
So, why does Wallach say that the practicalities of the new regime would be so different from current practices that people would immediately find them illegitimate, and would reject them? Putting this simply, for most people, what’s not to like? Can Wallach explain how the mere filling of the public purse, without further excessive Congressional spending can possibly produce effects more harmful than we are getting using current practices? I doubt it.
(Cross-posted from New Economic Perspectives.)