Proof Platinum Coin Seigniorage: A Political Game Changer for Progressives!
Now that a debt ceiling deal has ended the immediate crisis, the attention being given to the President's options, in case there was no deal on the debt, will fade into the background, and most of the options offered to get past the debt ceiling won't be discussed again, until the next time there's a “debt ceiling crisis.” In highlighting, in previous posts, the President's option of using Proof Platinum Coin Seigniorage (PPCS) to pay back part or all of the national debt, other bloggers and myself writing about PPCS, have raised broader questions of whether the President should use it to:
-- 1) pay back the national debt entirely,
-- 2) spend more than the United States collects in tax revenue whenever Congress appropriates such spending, and
-- 3) replace the current method of creating the credits necessary to spend Congressional appropriations through issuing and selling debt instruments with PPCS as the basis for creating those credits.
The answers to these questions suggest that PPCS should not be forgotten until next time, because if it were implemented right now, it would be a political game changer for the economy and also for progressives almost immediately.
Using PPCS to Pay Back the National Debt
Minting proof platinum coins with arbitrarily high face values, depositing them at the Fed, receiving electronic credits equal to the face value of the coins from the Fed, and then having the Treasury sweep the profits into the Treasury General Account (TGA) can fill the Treasury's purse to an arbitrary level selected by the President. The profits can then be used to redeem debt held by the Fed, debt held by the Trust funds (including Social Security) and Government agencies, and debt held by the non-Government Sector, including domestic investors and foreign Governments and investors.
The importance of using PPCS to pay back the debt isn't economic. Modern Monetary Theory (MMT) tells us that Governments like the US with free floating, non-convertible fiat currencies, and no external debt, cannot be forced into insolvency by economic conditions or factors. So, the government spending capacity of those nations isn't affected at all by the size of the national debt, or the debt-to-GDP ratio. Nor does the level of the deficit reduce spending capability; even though if it is too great, inflation may be the result. However, nations and governments are not purely economic and financial systems. They are also political systems. So, the issue of paying off the national debt has to be viewed from a political point of view, whether paying it off is necessary economically or not.
From a political point of view, deficits, the national debt, and very high debt-to-GDP ratios are a serious political and messaging problem for those who want to spend more than the Government can collect in tax revenues. People simply don't understand the fiat currency system, and they view the Government as they would their own household. They know that their debt is bad for them, and they also think that public debt is very bad for their country and must eventually be paid back through taxes.
We could try to educate people in the MMT point of view that Government “debt is not debt,” and could also eventually get them to accept that Government debt in the aggregate can be continuously rolled over and never paid off, and that its absolute level and even the debt-to-GDP ratio are of no consequence. But success in this kind of educational project would not come for years and years. It's a slow process, and we need to free up Government fiscal policy to handle our various problems by spending more than it taxes in the short run; not the long run.
So, how can we get people to support us in doing that? I think we need to remove the worries people have about public debts and deficits by removing them from the fiscal picture of the Government, i.e. by paying the debt off and by never running any technical deficits where Government spending exceeds Government revenue.
Until PPCS was legislated in 1996, the Executive didn't have the ability to do that without gathering enough revenue from taxation to generate sufficiently high surpluses for as long as it took to pay back the national debt. And that course was unacceptable, because paying back all the debt subject to the limit using surpluses would have been equivalent to draining the economy of all liquidity and destroying all economic activity.
Now, however, the PPCS capability allows the US Government to fill the Federal purse with financial assets sufficient to re-pay the national debt without removing and destroying existing private savings. PPCS could be used to pay back debt held by the Fed and debt held by the trust funds and other Federal Agencies, a total of $6.2 Trillion, almost overnight. The remaining national debt of $8.1 Trillion, would be repaid as it matured, along with interest due on the securities. Since most of the outstanding debt will mature within 3 years, in that period of time the US would be nearly debt-free, and its debt-to-GDP ratio would be among the lowest in the world.
It's important to emphasize that the capability to use PPCS, and to pay off the national debt, lies with the Executive Branch, alone. President Obama could see to it that the process is begun and that the repayment of the first $6.2 Trillion was completed this very week. By election time next year, close to $9 Trillion in debt would have been paid off, and the US debt-to-GDP ratio would be less than 40%. Mr. Obama could claim to be the President who placed the nation on the road to debt freedom, all without causing additional pain or the economy to deteriorate further. Here are some of the political implications of using PPCS this way, and minting a platinum coin with a large enough face value (say $30 to $60 Trillion) to pay off the national debt and do other things as well.
-- Lots of political slogans supporting doing nothing about our problems, due to “financial constraints” instantly are swept away. Imagine, if you can, American politics without having to argue about, or cope with, slogans or sound bites like these.
-- “The Government is running out of money.” (Not with a $60 T coin in the bank.)
-- “The Government can only raise money to spend by taxing and borrowing” (Not with PPCS)
-- “We can't keep adding debt to our national credit card.” (We won't be using any of the money on the credit card.)
-- “We need to cut Government spending and make do with no more money.” (Only if more spending would definitely cause inflation.)
-- “if the Government borrows more money, then the bond markets will raise our interest rates.” (The Government won't be borrowing anymore.)
-- “If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt, making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations." (Again, the Government won't be borrowing anymore, so who cares if they no longer want to buy our debt)
-- "Our grandchildren must have the burden of repaying our national debt." (There won't be any debt or any burden.)
-- “Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.” (Again, no debt; either mountain or molehill.)
-- “Our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.” (But it is sustainable. If we use PPCS, then we can have gaps between taxes and spending every year.)
-- “We need to cut entitlements like Social Security and Medicare, because we are running out of money and they are not fiscally sustainable.” (But they are with PPCS, because we won't be running out of money!)
-- “If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.” (Given PPCS, what we do now about deficits has nothing to do with our capability to make the investments we will need)
-- “We need to reduce our deficits to be fiscally sustainable.” (Deficits have nothing to do with fiscal sustainability in the sense of continued capability to spend, which will be very plain to people if $60 Trillion is sitting in the TGA.)
-- “We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.“ (Can't say that if most of the debt is about to be paid off.)
-- “Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly.” (PPCS can confront it responsibly, but the bipartisan horror just enacted can't.)
-- “We believe the days of business as usual must come to an end. We hold to a couple of simple convictions: Endless borrowing is not a strategy; spending cuts have to come first.” (Right! So let's stop borrowing and use PPCS.)
-- “Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three - Medicare, Medicaid and Social Security - Social Security is the most solvable. . . . “ (The budget can be be as big as we need it to be with PPCS.)
-- “The Social Security Trust fund is a fiction, a mere bookkeeping device.. . . There is no free lunch. There is nothing in the lockbox.” (There will be if we pay back the trust fund through PPCS.)
-- “There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.” (What's the problem? We can't run out of money with PPCS!)
-- “The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.” (What nonsense! As PPCS shows very well; the Government is not like a household. Households can't create unlimited funds through PPCS; but the Federal Government can.)
-- “The only way to tackle our deficit is to cut excessive spending wherever we find it.” (It's always good to cut spending that's not in the public interest. But if spending is having good results, and we're using PPCS, then there's no reason to cut it, whether taxes cover the spending or not.)
-- “We should also find a bipartisan solution to strengthen Social Security for future generations.” (With PPCS, we can easily strengthen SS by extending benefits, and we don't need to do it through a bipartisan Rube Goldberg contraption.
-- “The United States is in danger of becoming the next Greece or Ireland.” (Even without PPCS it can't become Greece or Ireland, only the next Japan. But with PPCS it can become the United States again.)
-- “Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus” (With PPCS, the debt-to-GDP ratio will be stabilized and reduced, but no "surplus," in the sense of more tax revenue than spending, will ever be necessary for revenue purposes.)
With the debt paid off, sound bites like the above won't be around anymore. When progressives bring up Medicare for All, or Federal Job Guarantees, or State revenue sharing to save jobs, a payroll tax holiday, or an infrastructure rehabilitation program, or education programs; or large scale programs to create a new energy foundation for our economy, conservatives will have to debate the merits of the proposals. They won't be able to say that we can't afford it because we're running out of money. When progressives propose funding for food stamps, or extending unemployment to 156 weeks, or even propose that all limits on the number of weeks for collecting unemployment be removed, conservatives won't be able to reply that we have a deficit problem, or that our national debt is too high, or that we have to be concerned about our poor grandchildren. They'd just have to admit that they don't care about the unemployed, and that insofar as they do care, they only care about making more of them so that wages stay low.
-- The neoliberal economic paradigm of response to policy proposals is constraining our politics in a very tight strait jacket, choking the life out of progressive initiatives. The first response to all proposals for change is to ask whether a proposal is fiscally responsible, where fiscal responsibility means, government spending that, whatever else it does, leads to a declining debt-to-GDP ratio over time. If CBO projections show that a program will increase deficits and add to the debt-to-GDP ratio, they are opposed, and, most often, rejected on grounds of “fiscal unsustainability.”
PPCS can change all that. It can change the paradigm governing political games in Washington. The deficit hawk ideas of fiscal sustainability and fiscal responsibility will no longer be relevant, once $60 Trillion in electronic credits are in the Treasury General Account (TGA). Then the important questions will be whether the proposed programs are likely to achieve public purposes or not, and whether if they are, our representatives will appropriate for "deficit" spending, if necessary, the already existing financial resources. A political game organized around messaging about the public purpose, is much preferable to one focused on whether we can meet a set of long-range targets in some deficit reduction austerity plan that, over time will destroy the real wealth, capabilities, and employability of most Americans.
-- If PPCS is used, messaging around the public purpose can't be opposed by austerity; but, instead, it will be opposed by claims and fears that PPCS will result in inflation. The argument of PPCS vs. inflation, however, is a much easier argument for progressives to win than the current argument of austerity vs. need. The reason is that in dealing with this last argument, progressives have granted and continue to grant the idea that deficit reduction is necessary for fiscal responsibility in the long run. This is a myth. But it is powerful. On the other hand, if PPCS gets rid of the need for austerity we can then consider whether PPCS will be inflationary.
Scott Fullwiler has recently done a comprehensive analysis of inflation possibilities with PPCS. It turns out that it is very unlikely to cause inflation because there appears to be no transmission mechanisms from the mere presence of PPCS profits in the TGA to inflationary outcomes. As always, Congressional appropriations followed by spending can produce inflation, if that spending exhausts the productive capacity of the economy. But that kind of inflation would result whether or not PPCS is used as the basis for spending.
Using PPCS to Spend More than the United States Collects in Taxes
Having revenue generated by PPCS, and using it to pay off debt, doesn't guarantee that Congress will want to appropriate spending in excess of tax revenues, and have PPCS revenue close the tax/spend gap. Congress may want a budget in which spending doesn't exceed tax revenues anyway, even with $60 Trillion sitting in the TGA. Or if it wants to appropriate spending in excess of tax revenues, it may still insist that the uncovered spending be preceded by selling new debt instruments in dollar-for-dollar correspondence to the new debt.
Or, perhaps the President may wish to close the tax/spend gap by issuing debt, rather than using PPCS revenue, because he wants to continue subsidizing investors in the bond markets. Projections based on CBO's say that over the next 15 years interest costs on the national debt would approach $12 Trillion. Paying off the national debt will eventually reduce these interest payments to zero. Investors in the bond markets will be angry at this development, so the Treasury continuing to issue debt, to be paid off on an annual basis, to provide them at least a fraction of the projected income (about 10%) expected under the old debt-based regime, is a possible outcome of the political conflict that is likely to occur when the Government tries to use PPCS to pay off the national debt.
This would result in continuing the existence of the national debt, though not in growing it, since the $14.3 Trillion we have now would be paid off, and any new debt incurred could be paid off quickly using PPCS, especially if Treasury issues only securities with terms of a year or less. If this were done, a decision to keep issuing debt, and using PPCS only to pay it off wouldn't materially effect the political background of budget debates. There would still be very low debt levels, with the debt being paid off every year and very low debt-to-GDP ratios. So, the very damaging austerity rhetoric and proposals we see today would still disappear and would no longer paralyze progressive politics.
Using PPCS to replace borrowing as the Basis for Creating the Credits Needed to Spend Congressional Appropriations
What if the President decided to use PPCS to create that TGA balance of $60 Trillion, and and also decided to replace all debt issuance as the basis for spending Congressional appropriations, and relied instead on taxes and PPCS revenue, alone? Then, there would be no more Federal debt, and there would be no further interest subsidies to the bond markets and foreign nations for placing their USD reserves in what is essentially a risk-free interest-bearing savings account at the Fed. The Government would “save” nearly $12 Trillion in projected interest costs over the next 15 years.
Considering that PPCS profits are considered “revenue” and not “debt,” the Federal budget would always be in balance, and so, the Government would never technically have a “deficit,” defined as the gap between spending and revenues. The gap between tax revenues and spending would continue to exist, however, and that gap is very important, because when Government spending exceeds tax revenue, the gap adds to non-government (including private) sector net financial assets, dollar for dollar. On the other hand, when tax revenues exceed spending, the gap subtracts from non-Government net financial assets. Of course, in the case of such a “surplus,” no PPCS credits would be subtracted from the TGA.
Possible Political Implications This Fall
I said earlier that having that $60 Trillion in the TGA, would change the background of political discourse and the paradigm governing political debate. With PPCS it could focus on public purpose and its relationship to policy proposals, rather than on issues of austerity and whether or not a particular proposal was “fiscally responsible” or “fiscally sustainable.” This change in focus will make a great difference in American politics, because it will expose the real motives of politicians very quickly, since they won't be able to hide behind the austerity slogans and rationalizations.
It's very important to see that this change in background and the terms of discourse doesn't have to wait for any new election results. If President Obama were to implement PPCS in the right way, this week, the transformation of discourse could start immediately. The $60 Trillion in the TGA account would sit there, a huge elephant in a small room. An overnight payment of debt immediately reducing the Fed and Intragovernmental debt to zero, and paying off $6.2 Trillion of the debt counted against the limit, would hit Washington like the proverbial ton of bricks, making it clear that the extension of the debt limit just passed was meaningless compared to the impact of PPCS. Progressives in Congress could immediately apply pressure to void the recent agreement on hurtful spending cuts this year. How could the leadership in Congress oppose voiding it? By saying that the agreement is more important than the fact, evidenced by the $60 Trillion in the TGA, that there was never a need for any spending cuts at all?
Good luck with that! A refusal to restore the cuts would make the people doing the refusing a laughing stock! Even if they got away with that first step, what would happen when Thanksgiving rolls around and the “super Congress” is deciding on further cuts and then presents these for an up or down vote. Will a majority in either House vote for cuts on the grounds that deficit reduction demands it, with $52 - $54 Trillion still sitting in the bank and Trillions in debt scheduled to be repaid over the next year? How would they spin that? How would they paper it over?
How will they act if and when progressives move to restore food stamp cuts and extensions of unemployment insurance, and State Revenue sharing, and payroll tax holidays? How will they act when the public realizes there's a huge amount of money in the TGA and no reason for Congress to go around cutting programs that benefit them? And when hundreds of thousands of outraged citizens, perhaps even millions, demonstrate across the country against the austerity kabuki and the tea party that was about to condemn working America to a decade of stagnation and suffering, when there was absolutely no reason for it; what will Congress do then?
I gotta say, I think they'd cave. The change in the material background resulting from the PPCS $60Trillion application would be a very powerful catalyst, powerful enough to overcome habitual patterns of thought, and delivering a shock to the neoliberal system that would free up progressivism to be militant and moral again.