Some time ago, in the pages of USA Today, Duncan Black, better known to some as Atrios voiced the immediate need for increased Social Security benefits of 20% or more even if it means raising taxes on high incomes, or removing the payroll tax cap on salaries.
Black is right about the need for increased benefits; but legislating that increase doesn’t require increasing taxes. In fact, Congress should both increase benefits and remove the payroll tax entirely.
But how is that possible without greatly increasing “the national debt”? The answer to that one is easy. Don’t tax or borrow to pay for it. Just mint a single one oz. platinum coin at the beginning of each fiscal year with a face value large enough to cover expected the cost of SS payments. Doing it that way will both take care of retirement needs and also provide a huge shot in the arm for employment, since the increase in Social Security benefit payments and the ending of the payroll tax won’t be offset by tax increases elsewhere that will depress aggregate demand.
How many times have you heard that the Government can only spend money after it raises revenue by either taxing or borrowing? Nearly every time someone talks or writes about the US’s public deficit/debt problem?
Why is it that nobody asks why, since Congress has unlimited authority to create coins and currency, it doesn’t just create money when it deficit spends? The short answer is that Congress in 1913, constrained both itself and the Executive Branch from creating currency or bank reserves, delegating its power to do that to the Federal Reserve System.
But coins, it turns out are different. They’re the province of the Executive Branch, and the Treasury. And Congress provided the authority, in legislation passed in 1996, for the US Mint to create one oz. platinum bullion or proof platinum coins with face values to be specified at the discretion of the Secretary of the Treasury, having no relationship to the market value of the platinum used in the coins.
These coins are legal tender. That is, they are tax credits, which the Treasury is obligated to accept in payment of taxes, if they ever fell into private hands. And when the Mint deposits them in its Public Enterprise Fund (PEF) account, the Fed must credit it with the face value of these coins, because the asset value of the coin is, legally, its face value. The difference between the Mint’s costs in producing the coins, and the reserves provided by the Fed in return for a deposit of such coins is the US Mint’s “coin seigniorage” or profit from the transaction.
The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Fed for profits. These then go into the Treasury General Account (TGA), the primary spending account of the Treasury, narrowing or eliminating the revenue gap between spending and tax revenues.
So, platinum coins with multi-trillion face values, can produce profits closing the revenue gap, while still retaining the deficit between tax revenues and spending that can add to aggregate demand in the private sector and produce full employment. Platinum Coin Seigniorage (PCS) is also a way for the Executive to end debt ceiling crises, since seigniorage revenues can be used to repay debt instruments when they fall due, without needing to issue any more debt.
If all debt instruments are re-paid by using seigniorage, eventually the US would have no debt subject to the limit, or presence in the bond market, and would pay no interest to bond holders. No one would worry about the public debt, or use its size to justify blocking legislation.
But won’t creating all these reserves in the TGA by using PCS be inflationary? No, it won’t, because the causal channels for creating it won’t be there. But that’s a story for another day, or you can read it now at the link, along with consideration of possible legal, institutional, economic, and political objections.
PCS-based elimination of debt can both pay for Social Security benefit increases, and also end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast focused on narrow monetary cost considerations. Instead, we can use a broader reality-based framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government.
If PCS were used to supplement taxing and Federal borrowing was ended, then Congress and the Executive could evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues would be about what people need, and what improvements we can make by working together through our Federal Government.
We would begin talking about Real Fiscal Responsibility, rather than the false notion of it we see today, based on the ideal of a balanced budget, or, at least, a decreasing debt to GDP ratio, that has no relation to fiscal sustainability or responsibility in nations like the United States, with non-convertible fiat currencies, floating exchange rates, and no debts is currencies they do not issue. Real Fiscal Responsibility would be the fulcrum of a new politics, not debt, deficits, and debt-to-GDP ratios. If you’d like to see this paradigm shift in fiscal politics happen, then please learn about this effort and help make it a reality.
Btw, Mark Begich just announced that he’s running on increasing SS benefits. That’s a winning message Mark. Now this piece tells you how to pay for them, when your Republican opponent asks you in a debate “How you gonna pay for them”?
Yes, the platinum coin needs to be seen as not a gimmick but a way to circumvent the arcane system we have now to actually get more reality based. As you emphasize, put the public’s need first. Money responsibly used can accomplish that.
Right! It’s a legal way of getting around the debt limit law, a law that preceded the United States becoming a nation using a non-convertible fiat currency with a floating exchange rate and no debts in foreign nations. Economically, the law has no function; but politically it allows Congress to pay political games. With one hand it can appropriate funds for particular spending programs, and with the other it can use the debt ceiling as an excuse to cut some of the programs it didn’t have the guts to cut when it passed a budget or a continuing resolution. There’s no reason why the Executive Branch should allow Congress to put it in the double bind of demanding that they spend x, y, and z in the budget, and then refusing to give the Executive the wherewithal to fulfill Congress’s mandate. The Executive now has a legal way to get out of that double-bind, while at the same time it can demonstrate that the Federal Government can never run out of money. It ought to exercise that legal way and 1) make the debt limit law a dead letter, of no consequence, all sound and fury signifying nothing; and 2) educate people to the fact that the Federal Government can create as much in currency and reserves as it wants to because it is fiat sovereign currency issuer; not a currency user.
One, increase the interest rate paid on the special bonds in the “trust fund” by an amount that puts SS in balance. That is all it would take – no need to reduce current incomes to “pay” benefits.
Two, every business should want higher or stable SS benefits, because that is future money that allows seniors to buy goods that younger folks produce. Cut the benefit, cut your market size. Raising payroll taxes and caps may be a wash or might reduce current aggregate demand. So long as we have enough future productivity to make goods, then we should not have problems in paying decent SS benefits.
Three, lower the full retirement age allowing people to leave the work force to retire – especially when health forces one out.
Increasing the interest rate paid to SS would close the gap. But it would not stop the austerians, who would use projections on the increased interest payments to make claims that increased future borrowing to pay that interest would make the Government’s spending fiscally unsustainable. However, using the platinum coin solution to the shortfall would not raise questions of fiscal sustainability; but on the other hand, would raise the general question of whether it is possible for the Treasury to become involuntarily insolvent.
Poverty rates amongst the elderly are sub-5%. Poverty rates among the rest of the population approach 20%. Seniors choose to buy health care more than anything else. Unemployment rates for health care workers are well below the national average. Are you seriously suggesting that what we need is richer seniors doing nothing with the extra transfer payments but driving up the price of health care? Do you sideline as a drug company by any chance?
First, they’re not transfer payments. Money is created anew in the private sector when the government spends. It is destroyed when the Federal Government taxes or borrows.
Second, of course, I’m not suggesting we need more rich seniors. What I’m proposing is that the economic right of all seniors to retire in dignity, one of FDR’s economic bill of rights be implemented and preserved for the rest of the history of the United States.
Third, I’m also in favor of everyone who wants one being able to get a federally-funded job offer at a living wage with full fringe benefits. That’s FDR’s right to everyone having a full time job if they want one.
Fourth, if we implemented enhanced Medicare for All, HR 676, then we’d save $900 Billion per year out of the profits of private sector and businesses all over the country.
Fifth, the idea that Seniors choose to buy health care is profoundly misleading. It is a bad choice for seniors, one in which the deck is stacked against them. They need more health care than younger people, so they have no choice, they either get it, or they die quickly? Why is it you want seniors to die quickly?
Hey Joe, why the coin over the government spending what it needs to and paying interest on reserves? Thanks.
It’s political, To get the authority for the Treasury to spend whatever it needs to fulfill appropriations you need to get rid of the debt limit. No prospect of doing that soon, in the present political context. In addition, if you don’t mint that big coin, the kinds of arguments you see here, will continue to seem credible and be accepted as wisdom, so we progressive agendas will continue to have the “How you gonna pay for it” hill to climb.
To fix the economy, we have to get rid of that hill, and a public purse full of $60 T in reserves with declining debt does that for us. Once the coin is minted the way is open for political change, then we will be able to pass legislation to fold the Federal Reserve into the Treasury so that the Executive can always spend its appropriations from Congress.
entreposto, where do you get the sub 5% poverty rate for the elderly? 2011 to 2012 figures are 13% see Poverty Rate by Age. The poverty rates in the elderly are skewed, because for the elderly, “If you are poor, you die” See Poverty and mortality among the elderly: measurement of performance in 33 countries 1960-92
I don’t care if the coin is made of platinum or plasticine, the effect will be the same, it will inflate the currency making debtors (particularly the government) able to reduce what they effectively owe. In terms of purchasing power, this will dishonestly take from savers an equivalent amount. The answer to our national deficit reduction is not to inflate the currency but to claim back what has been taken away from most of the community. This is the opportunity values of land, which is created by the existance of the community and its growth. (If you don’t agree, answer me this: why is land in the center of town worth thousands times more that when it is in the country?)
You have a lot of assertion in this comment, but no causal channels and mechanisms describing how the currency will get inflated. I suspect you don’t know how, and are just spewing forth hot air. In my book, linked to above, I provided an analysis of the effects on inflation of minting a $60 T coin and using it to pay back public debt as it falls due, and to provide funding for deficit spending. Please show me the error in my analysis of the inflation impact of such a coin, because after examining the possible causal channels for inflation, I conclude that other things being equal, there would be little or no inflation impact on minting such a coin and having the Fed credit the Treasury spending account with the $60 T.
So, what’s the difference between my analysis and yours. Show me that you know what you’re talking about, and are not just feeding us hot air.
Thanks, Joe Firestone for refreshing the HVPCS theme….. I’ve been avidly lurking here since it hit the national media back in 2012 leading up to the “debt crises” (not!). I agree that the ideas in MMT and some from the Heterodoxy more generally, ought to be a more accurate description of how the inadequete system we have can better serve the public purpose. I appreciate all the authors that contribute here.
Macrocompassion – this is one of several earlier criticisms of MMT. Perhaps this previous post will help you sort it out: http://neweconomicperspectives.org/2011/08/coin-seignorage-and-inflation.html
and this: http://www.theatlantic.com/business/archive/2012/03/the-hyperinflation-hype-why-the-us-can-never-be-weimar/254715/
Anyway Joe, I wonder about how to popularize MMT (plus het ideas) beyond an academic context…..
In my own case I’ve had lots of day dreams about the symbology of The Coin and searched for examples in the arts to convey the central import of it. Since all of this is born of the web here’s some links that have fired my hopes and expectations the most. These are offered as more arrows for the MMT quiver.
Description of crazy media environment:
UMKC students should design an actual coin that conveys the rich symbolic possibilities:
and mount it in Ft. Knox because it has a face value of $1 x 10 to the 15th (a cool quadrillion) just to begin to acknowledge and engage everyone’s limitless value by virtue of being. Sure we can guard it with guns and stage festivals in it’s honor. Idolatry is very powerful motivation.
And how about a design that conveys the dynamism of all the intellectual labor it will take to manage the other side of the coin (i.e.. inflation, taxes, disasters, job guarantee)? To complete the currency circuit….
I think the Yin-Yang symbol captures the self-creating and dynamic dual nature of The Coin:
And yes, the effort needs a sympathetic culture-jamming savior such as this guy to strap themselves to the mast:
and a song:
and how about putting up an answer to the so called Debt Clock in Times Square and call it the National Wealth Clock or just enlist that enviro group to shroud and tie themselves to it…….
I feel better now….. till the next gov shutdown
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Your first reference merely states that this issue of a coin will not inflate the currency. It does not explain why. Why it will inflate is very simple. It will allow the Fed to issue more (electronic) money to the banks and to the treasury for use within the “outside” part of the system. This activity means that there will be less debt but more cash to spend by these parties. Since the supply rate of production is not going to change by much, and the eased debts will not cover the total sum, money will be easier to obtain and the currency will inflate. Money has been cheapened due its reduced scarecity. MMT seems to me to be a kind of scam way of explaining ones way round a simple situation using confusing language.
If your first reference is to me, it is not so that it does not explain why inflation will not occur. The chapter on PCS and inflation here does explain why this won’t happen without Congressional over-spending.
Your explanation of why it will doesn’t work however, because 1) the Fed can issue as much electronic money as it wants to now to the banks, and this capability has nothing to do with platinum coins; 2) the Treasury issuing the coin forces the Fed to deposit reserves in the Treasury spending account, but it doesn’t liberate those reserves, which just sit there until they’re used to pay down debt as the debt falls due, or until the reserves are used for deficit spending appropriated by Congress. These operations will add reserves to the system. However, the reserves added to the banks’ own accounts aren’t available to the economy. They remain in the reserve accounts of the banks at the Fed, essentially locked up there, and can only be used in the repo market. Among other points, this one is made by Scott Fullwiler in his coin seigniorage and inflation post, linked to just above, on which my treatment in my book is based.
Finally, if the Treasury is adding reserves to the system when it liquidates debt and deficit spend, the Fed will not itself add further reserves. What it will do instead is to use Open Market Operations (OMO) to maintain the overnight rate it is targeting by selling Treasury debt it has previously acquired. Or, alternatively, it will perform the same function by paying interest on the reserves at a level sufficient to maintain its overnight rate.