Blog #23: Sovereign Debt Limits: Response to Comments

Thanks for comments and apologies for being late. I justreturned from Rio. And lest you think I was just tanning on the beach, I wasactually indoors at a conference—underground, no less.

Rather than repeating the questions, let me justsummarize six key issues raised.

  1. Weneed to tie ourselves to the masthead of budget limits to keep politicians fromspending too much. For better or worse we have a budgeting process throughwhich Congress decides how much to allocate to programs, then submits the planto the President. Once approved, this authorizes spending. That is the“democratic” process through which our elected representatives decide whichprograms are worthy of funding—and at what levels. Much of the spending is“open-ended” in the sense that it is contingent (unemployment benefits paidwill depend on economic performance, for example). I do not see how adding aconstraint beyond this is either necessary or consistent with democraticcontrol and accountability. Certainly I do not support many or even most of theprograms Congress and the President decide to fund. I can vote to throw thebums out. If I’m rich enough, I can try to buy them off with campaigncontributions. By its very nature a debt limit is arbitrary and inconsistentwith the budgeting process. In the past, it never mattered—the budget trumpedthe limit and Congress routinely raised the limit. Now the politics of aminority is trying to subvert the budgeting process. In truth, the biggerdanger is the new super-duper hand-picked for ignorance deficit committee thatis authorized to ignore Congress’s will as expressed in the budget and to slashand burn programs in a thoroughly undemocratic manner.
  2. Publicgoods provision is always less efficient than private goods provision; andproduction of public goods crowds-out private goods and hence must reduceoverall efficiency. This is faith-based economics of the worst sort. It hasabsolutely no evidence to support it and defies any logic. Outside of communistor socialist societies, I truthfully cannot see any legitimate use for the hazyterm “efficiency” in economics. Unlike communist societies, capitalistsocieties never operate near to full capacity (with World Wars the onlypossible exception) and hence it is never a simple matter of taking resourcesaway from private use to support public use. And in any case, one cannotimagine any private production without first having in place publicprovisioning.
  3. Abloated government is a drag on growth and causes inflation. Could be true.However, everywhere I look in the West (that is to say, among developednations) the problem is government that is far too small to succeed in thetasks at hand. Too much privatization, too many idle resources, inadequateprovision of essential public services.
  4. Whohas the authority to issue “warrants” or “platinum coins”? As discussed above,Congress and the President first work out a budget. That authorizes Treasuryspending. We can come up with all sorts of procedures to allow Treasury toaccomplish that task. A relatively primitive but effective one would be for itto simply print up Treasury notes and spend. Or it can directly keystrokeentries into the deposit accounts of recipients—but that requires that Treasurycan also keystroke reserves onto bank balance sheets. Since we divide the tasksbetween Treasury and Fed, having banks “bank at the Fed”, it must be the Fedthat keystrokes the reserves. There is no fundamental reason for this—bankscould have accounts at the Treasury used for clearing and then the Treasurywould keystroke the reserves. But we don’t do it that way. So we could have theFed act as the Treasury’s bank, accepting a Treasury IOU and keystroking bankreserves. But we don’t do that either—we say that although the Fed is theTreasury’s bank, it is prohibited from directly accepting a Treasury IOU. Andhence we created complex procedures that involve private banks, the Fed and theTreasury to accomplish the same thing.

    Now I went through all that simply as an introductionto the warrant and platinum coins proposals. Treasury has the authority toissue platinum coins in any denomination, so could for example make largepayments for military weapons by stamping large denomination platinum coins. Itwould thereby skip the Fed and private banks. And since coins (and reserves andFederal Reserve notes) don’t count as government debt for purposes of the debtlimit this also allows the Treasury to avoid increasing debt as it spendsplatinum coins. Similarly we could create some new IOU we call a warrant thatis made acceptable (for example) in tax payment. It would be a Treasury IOU butwould not be counted among the bills and bonds that total to the governmentdebt. Like currency it would be “redeemed” in tax payment, hence demanded bythose with taxes due. So it is just another finesse to get around arbitrarylimits or procedures put on Treasury spending.

  5. TotalFed commitments (so far) to bailout Wall Street: $29 trillion. That figureresults from a close study by two UMKC PhD students who will soon be releasingtheir study.
  6. Whatabout Italy (etc)? Do they face market imposed debt limits (rather than simplytying their shoes together voluntarily)? Yes. Go to my GLF blog today.They are now more like US states, users not issuers of the currency.

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