Ryan's Follies: A Crushing Burden of Public Debt
In celebration of Paul Ryan's nomination, and in consideration of his reputation among Washington, DC villagers as a fiscal guru, I thought it might be fun to do a series of posts, of which this is the first, critiquing examples of Ryan's past wisdom. Here's the first example:
”We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.”
The debt referred to here by the Congressman is the accounting construct of the national debt subject to the limit, or the face value of the debt instruments the Government has yet to redeem. But just why the “burden of debt” is so crushing, or even a burden at all to you and I really needs to be explained carefully by Ryan and the other deficit hawks to the rest of us.
I don't see any public debt burden on myself or any American people at all either at present or in the future. Why? Because a burdensome debt is one that you and I will personally have to pay back, and we just won't ever have to pay the public debt of the US back from taxes that we are asked to pay to the Government. That is, we won't unless Congress and people who believe the things Mr. Ryan believes, decide to pay the debt by levying taxes, cutting Government spending, and running Government surpluses until it is paid.
That was done once in American history during Andrew Jackson's Administration, when the public debt was paid by raising more taxes than spending. The result was that Martin Van Buren, Jackson's successor became a one-term President, following the panic and very serious depression of 1837. That depression was caused, in great part, by a shrinking of private demand caused by Government austerity, the successful pay back of the debt, and the continuing policy of balancing the budget. In addition, every sustained attempt in American history to run budget surpluses was followed by either a depression or a recession. A summary of the depressing record is here.
Vice-Presidential candidate Ryan either believes himself, or wants you to believe, that the “crushing debt” will have to be paid for out of taxes levied on you and I. But there are a number of different ways to handle the national debt that don't place any burden on us at all.
First, there's the way we've been handling it up to now, namely by rolling over previous debt and paying interest on it as it comes due. We'll always be able to do that because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account, or buying a debt instrument that pays higher inerest. They'd rather buy the debt instruments, of course. However, low the rate of interest is, it's better than the rate they'll get on reserves.
Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation''s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments are therefore nearly risk-free. So, they're a safe harbor for investors who'd rather earn a better return on the USD they hold than interest on reserves or no interest at all.
Second, in lieu of simply rolling over our debt and increasing it, as needed, Congress can decide to get rid of all the public debt, by simply removing its mandate forcing the Treasury to issue new debt when it deficit spends. Congress needs to replace it by granting authority to the Treasury to spend Congressional appropriations by directly marking up private sector bank accounts, or if it continues to spend through its Federal Reserve Accounts, Congress will have to give it authority to mark up its Federal Reserve accounts when it wants to deficit spend Congressional appropriations. If this is done, then Treasury will be able to make all its debt payments when they become due, and most of the public debt will be gone within 10 years, except outstanding longer-term instruments. If Congresspersons like Paul Ryan think the debt problem is so burdensome, then there is nothing preventing them from giving Treasury the above authority and getting rid of the debt. is there?
In fact, the reason why any public debt at all exists right now is because Congress mandates that new debt be issued when the Government deficit spends. So, Congress wants the Treasury to manage the debt through the roll over method, and it is Congress's own fault that the United States has any public debt today, or it would be except for the following.
Third, another way the Treasury can pay back the national debt, if it wants to, and without increasing taxes, is for it to use Proof Platinum Coin Seigniorage (PPCS). Since passing some obscure legislation in 1996, Congress allows the US Mint to produce coins of arbitrary face value using Platinum. A coin with face value $1 Trillion could be minted and deposited in Mint's account at the New York Fed. The coin would be legal tender, so the Fed would have to accept the deposit and mark up the Mint's account. The profit (the face value – the cost of making the coin) can be swept by the Treasury into its own account, and then used to mark up private sector accounts in Government spending, including repayment of debt instruments when they come due. Enough coins can be produced from time-to-time to both eliminate the gap between taxes and spending (the deficit), and also to redeem debt instruments. Or, alternatively, for example, the Mint could produce a single proof platinum coin with a face value high enough to cover complete repayment of the public debt and likely deficit spending for a number of years as in this $60 Trillion plan.
So, there are least three ways to manage the public debt, two of them allowing it to be paid off, which don't involve increasing taxes. That's why the burden of that debt is illusory, and that's why our new Vice-Presidential candidate Paul Ryan is telling us all a fairy tale when he says we face a crushing burden of debt.
What about his remark that the debt will soon eclipse our whole economy? I suppose he means that its size will soon match our annual GDP, which is true, because as of this writing it is near $16 Trillion. But that comparison is a silly one, as is the debt-to-GDP ratio derived from that kind of thinking.
The GDP is an annual statistic. The debt (roughly) is the accumulation of deficits since Andrew Jackson last paid it off in January of 1835. So a fair comparison, if Ryan wanted to make it, would be the national debt compared to the sum of the annual GDP since 1835. I won't calculate that sum, but a back of the napkin calculation indicates that the close to $16 Trillion national debt is about 8% of the cumulative GDP during the past 20 years. Isn't it funny, how the severity of the debt picture can be greatly affected by the denominator one uses in one's debt-to-GDP ratio?
To tell the truth though, neither the size of the national debt, nor the debt-to-GDP ratio, whatever the denominator used, are relevant to the capacity of the Government to spend either in the present, or in the future, because their size has nothing to do with the Constitutional authority of the US Government to issue currency and create money, and also has nothing to do with the solvency of the United States Government, which is guaranteed by the US non-convertible fiat currency, accompanied by a freely floating exchange rate, and external debts denominated in any other currency than the dollars our government has the unlimited constitutional authority to create. So, not only is Ryan's comparison inappropriate, but it's also irrelevant to the real issue being raised which is the continued solvency of the Government.
In my next post, I'll discuss more of Ryan's follies. But before I do that it's only fair to note that the so-called “debt problem” isn't a construct confined to Congressman Ryan, or even he and his boss, Mitt. It's a “problem” that has also been spoken of in similar terms by President Obama, and one of his favorite appointees to his Fiscal Commission, and his reputed favorite to succeed Tim Geithner as the next Treasury Secretary, Erskine Bowles. So, the particular Ryan folly we've considered here is far from his and the Republicans alone, but also is well-represented in the highest reaches of the Democratic ranks. That's why more and more people, contemplating the current political scene in the United States, are concluding that the American people are about to be screwed real good and proper by their political elites, and their utterly counter-productive, utterly stupid, and utterly immoral policy of more tax cuts for the very rich and austerity for the rest of us!