For example, here's Paul Krugman's argument:
But wouldn’t the coin trick be undignified? Yes, it would — but better to look slightly silly than to let a financial and Constitutional crisis explode...When it comes to doing silly undignified things, this kind of advice would have been met by our mothers with the traditional response of: "So if your friends jump off a cliff does that mean you need to follow them?"
...it’s the president’s duty to do whatever it takes, no matter how offbeat or silly it may sound, to defuse this hostage situation. Mint that coin!
Seriously, that's the grade school level of thinking on which this whole argument is based.
I understand that these folks are panicked at the threat of a default by the United States government. And isn't that just what hostage-taking is designed to produce...panic? Thank goodness we have a President in the White House who doesn't tend to go off the rails into childish responses at a moment like this - but has a habit of thinking through these things like an adult.
First and foremost President Obama has said that he will not negotiate with the Republicans about the debt ceiling. So what he's signaling from the outset is that he is not going to engage in this little game of chicken. We've already seen how that has resulted in Republican leaders backing off the threat.
But I've always suspected that the President wouldn't have made that strong stand without a plan to protect the American people from financial collapse if Republicans were stupid enough to go there. Of course he's not going to broadcast that plan and let the media tear it to shreds in the eyes of the public. And he's not going to sink to the level of the tea partiers in being silly or explosive.
That's why I think his plan will be something more in line with what Edward Kleinbard suggested.
He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.This idea also has precedent in that the state of California did it as recently as 2009.
The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.
To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.
Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.
I don't know if this is exactly what the President has in mind. And hopefully the Republicans will relent on this nonsense before we have to find out.
But I can assure you that meeting the tea partiers at their level of crazy is NOT something this President is likely to do.
"When it comes to doing silly undignified things, this kind of advice would have been met by our mothers with the traditional response of: "So if your friends jump off a cliff does that mean you need to follow them?"
ReplyDeleteSeriously, that's the grade school level of thinking on which this whole argument is based."
Smarty, that isn't actually an argument against platinum coin seignorage there. I don't think it's a bad idea - certainly no better or worse than the idea of scrip.
There's a huge gulf in difference between crazy-irrational (Tea Party views on the debt ceiling) and crazy-unusual (responses to going over the debt ceiling - all of which will be crazy to some degree or another).
I don't think Smarty is arguing the point of the coins validity. I agree with her that this President doesn't cotton to gimmicks and doesn't like setting precedents of unusual administrative behavior. The coin would set a precedent that could lead, down the road, to bad behavior. The President has signaled loudly and clearly that he wants this issue settled now, the way it should be settled: by Congress passing the debt ceiling bill, cleanly and without drama. This is a reset back to what is normal for our country.
DeleteI like the I.O.U. idea, though.
I don't know about this, sibusisodan. I'm still believe that Paul Krugman is showing his political ignorance yet again.
DeleteNow we know why he didn't do too well while he was in Washington. The same goes to Bob Reich.
We on the left may despise Alan Greenspan, but at least he knew a thing or two about politics. And economists like Krugman and Reich still can't figure why Washington chose to listen to him (and not them) for 40 years!
Actually, apparently the Obama White House has been consulting with Krugman, most specifically during the recent fiscal cliff/curb nonsense. He says they even followed some of his suggestions.
DeleteTien Le: I agree that Obama is not gimmicky. I disagree with the conception of seignorage as a gimmick. Especially if you then go on to say that issuing scrip would somehow be less gimmicky. Either they both are, or neither is.
DeleteThey are both highly unusual responses to rare and crazy situations. They both have the problem of setting some kind of precedent. Neither is any less plausible or legal than the other. That's my point of contention.
I entirely agree that a clean raise is really the only way forward. But should that not happen, something like this will have to be done: either scrip, coins or something else. And it will be crazy. But there will be no other choice.
sib
DeletePart of my point is to suggest that saying "Yeah, the platinum coin is a crazy idea - but not as crazy as what the R's are doing" is NOT a good argument. And yet that is exactly the argument Krugman and many others are making.
And I suppose we'll just have to agree to disagree that the script is just as crazy of an idea. Part of the problem we're facing is that almost no one (including me) really understand much about monetary policy. And so the idea of a $2 trillion coin sounds crazy. But an IOU...that is something most people understand. You can be sure that either way, Republicans will raise holy hell. Public acceptance of the alternative will be a crucial factor.
Finally, as Kleinbard points out - the script does indeed have precedence after being implemented successfully in CA.
"Part of my point is to suggest that saying "Yeah, the platinum coin is a crazy idea - but not as crazy as what the R's are doing" is NOT a good argument."
DeleteRight, it isn't. But it's a true statement, isn't it? It's a crazy idea, but better than the alternative. There's no other argument one can make for this kind of thing - it's the lesser of two evils. I don't see else you could say. It's true of every possible solution.
The idea that the govt of the largest economy in the world should choose to fund any purchases by an IOU (or by finessing the 14th Amendment) is also crazy. It would also work, but it would be crazy to have to do it.
On the coin vs scrip, try this: I am the US govt. You are one of my creditors. Perhaps I'm paying your invoice, or your salary.
I have a teensy-weensy little cashflow problem. So I can do a couple of things: mint some coins, and pay you in money, as usual (oh, the coins would be made out of platinum, but don't worry about that - what I give you will be just regular money).
Or I could give you an IOU. It wouldn't be a govt bond. It wouldn't be money. It would be an IOU. You have to assume that at some future date, I'll exchange it back for money. I almost certainly will, but you won't know when. You may have to hold it, or try to use it, for a few weeks.
So, which of these would you feel more confident receiving - regular money, or an IOU? Given that you probably have other people to whom you owe money - and are counting on my payment to do able to pay them?
I would choose the money, every time. Because I wouldn't have to worry about other people accepting it. And unlike the state of CA, the Federal govt can mint coins. CA had few other options.
I agree an IOU is an easier idea to grasp than the platinum coin. But from a daily transaction basis, the upshot of the coin would be much more 'normal' - whatever that is.
oh, and sorry for the length! Enjoying the blog, as usual.
DeleteOn the issue of the argument, if you really feel the need to sell the idea of the coin, then the whole purpose of the argument should be to suggest why its not crazy.
DeleteNotice the different approach taken by Krugman arguing for the coin and Kleinbard arguing for the script. If you think both are equally crazy (something I still don't buy), Kleinbard makes a MUCH more convincing argument.
The issue of precedence is not about what options CA had - but that its been done and worked. That tends to calm people. Here's what he said about the issue of the use of a warrant in terms of what happened in CA:
Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.
I agree that with the use of the coin - money is money. If we could educate the public that its NOT a crazy idea, it might work. But folks like Krugman aren't helping.
And just so you know, I LOVE a respectual argument. So thanks for weighing in.
My reading of the 14th amendment is that scrip could not be used to pay off the already existing debt. But Obama could order treasury to pay the debt in real money but use the script to make up the difference for other contractual obligations (i.e., military procurements, etc.)
DeleteI also think Obama should make a point of *not* using scrip to pay SS and military salaries. The burden of the IOUs will hit contractors and health providers, who will promptly scream to their congresspeople to knock it off and just raise the damn debt ceiling already.
Really, as long as Obama doesn't do anything silly, like mint a trillion dollar coin, the politics of this should be a clear winner for him.
And a lot of the saner Republicans understand this already. Push comes to shove, either Boehner will fold and allow another vote like the fiscal cliff (majority Dems plus a few Republicans to make up the difference) or Pelosi can push through a discharge petition to bypass Boehner.
Either way, the Republicans really have no leverage in this fight.
I think Krugman has mellowed a little since 2009, perhaps becoming a little more realistic about the political side of these policy debates. I actually don't mind him (and others) presenting some more "out there" ideas. We need creative thinkers who push boundaries, if, for not other reason, that it creates space for more reasonable alternatives (e.g., the scrip idea).
ReplyDeleteWhat is annoying is how they react when their ideas don't get adopted. Some of them are far to quick to adopt the "he caved" or "he's a tool" response instead of just acknowledging that they failed to make a persuasive argument.
Chris,
DeleteI agree that having a left flank that pushes the boundaries can be helpful.
Chris,
DeleteExactly. Good point. I like having people thinking outside the box. If they could apply less ego and more maturity to the practice, we'd all be better off for it. One thing I had to learn in my growth as a person is to avoid the "I thought of it, therefore it's correct" way of viewing my ideas.
sibusisodan: just to clarify, I do agree with you, both the coin and the script are gimmicks. I'm just saying as gimmicks go, the script is more acceptable to me psychologically for the very reasons Smartypants outlined. We've been conditioned to understand the concept of the I.O.U. That said, I doubt the President would resort to either concept and will stick with pushing for the clean debt limit raise and getting back to business as usual.
ReplyDeleteI agree - I don't think Obama will wind up needing any of these options. Chris pretty well outlined what's most likely to happen up above. But I do believe that Obama has planned out what he'd do just in case. And as I said, he's not likely to tip his hand on what that will be unless/until its necessary.
DeleteYep. He's very good at keeping his cards close to his vest--ask the Israelis. Ask Osama Bin Laden. I like the idea of thinking he's got a card up his sleeve in this round.
DeleteTein Le,
DeleteMy observation is that PBO doesn't tend to take on fights he hasn't gamed out a way to win. That's part of what bugs so many on the left. He doesn't bluster (and fail). That's why I feel pretty confident he's got something up his sleeve on this one - just in case he needs it.