Contemplating the likelihood that Hillary Clinton will win the presidential election, and may well carry in with her a Democratic House and Senate Paul Krugman considers what he ought to do to improve the economy. He says:
There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.
How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing.
Let me walk through this case, then address some of the usual objections.
Then Paul Krugman takes us through brief examples of pressing needs for public investment in Washington, DC, and Florida, and says there are similar stories all over America, so that infrastructure investments would surely increase our real wealth. He then points to the fact that the federal government can borrow at extremely low interest rates on both 10-year and even 30-year bonds. He then argues:
Put these two facts together — big needs for public investment, and very low interest rates — and it suggests not just that we should be borrowing to invest, but that this investment might well pay for itself even in purely fiscal terms. How so? Spending more now would mean a bigger economy later, which would mean more tax revenue. This additional revenue would probably be larger than any rise in future interest payments.
And this analysis doesn’t even take into account the potential role of public investment in job creation: Despite a low headline unemployment rate, the U.S. economy is still probably short of full employment, and an investment agenda would also offer valuable insurance against possible future downturns.
Compelling argument, right? Only if one assumes that the only way the government can invest is by first borrowing the money to spend.
But, If the government can always spend on investments by creating reserves without issuing bonds, then the fact that interest on government debt instruments is very low right now is irrelevant to its ability to invest. And, Krugman does know that issuing bonds isn’t necessary if the government wants to add reserves to its spending accounts at the Federal Reserve for a particular purpose. We know that because he has previously advocated for using platinum coin seigniorage to create reserves.
In fact, Krugman first noticed and publicly acknowledged the platinum coin option for generating reserves in Treasury accounts at the Fed and getting around debt ceiling crises during the summer of 2011 when Jack Balkin discussed it. When the next debt ceiling crisis occurred during January of 2013, he advocated for using the Trillion Dollar coin, calling it “silly” but viewing its use to get around the debt ceiling as justified by the silliness of Republican use of the debt limit to avoid paying government bills already incurred, and by the duty of the government to avoid default.
Krugman understood then that the government could deficit spend without issuing debt even under current law, but he also thought, or at least contended, that if the government did do that it would later need to “sterilize” its use of the Trillion Dollar coin by issuing and selling $One Trillion in bonds, and then using the reserve credits from the sale to buy back the Trillion Dollar Coin from the Fed, and then melt it down to destroy it.
Of course, the law authorizing Treasury to have the Mint create such a coin and deposit it at the Federal Reserve doesn’t require the government to buy it back from the Fed at some later time. So, the requirement for “sterilization” of high value platinum coins doesn’t exist.
Krugman, however, evidently believes that sterilization ought to be done to minimize the danger of inflation (Weimar! Zimbabwe!), resulting from Treasury filling its purse by forcing the Fed to issue reserves to Treasury it can then use to spend appropriations. So, perhaps Krugman, and others who have echoed his view, believe that since he thinks it ought to be a requirement of the law then surely it is that.
The potential danger of inflation resulting from using the platinum coin option certainly merits discussion, which I’ve provided elsewhere. But, as I’ve argued there, the danger of inflation by generating reserves from issuing platinum coins is no greater than the danger of inflation by generating reserves from issuing and selling Treasury interest-bearing bonds. So, it is hard to see why borrowing existing money from the non-government sector of the economy is a better option than using platinum coins, or even having Congress grant Treasury authority to mark up its own accounts at the Fed in order to spend Congressional appropriations.
If we did stop issuing interest-bearing debt and used reserves generated from platinum coins instead, then the political issue of whether borrowing is desirable would not arise at all. Nor would the political issue of whether “the debt” is “too much” at $19 trillion.
In fact, using platinum coins would avoid the Treasury having to make interest payments on the debt, and also would result in the Treasury gradually liquidating the $19 trillion in debt as it falls due. We would not then have to listen to the national debt mongers led by Peter G. Peterson any longer, and, of course, we would no longer have debt ceiling crises to worry about and to provide distractions for Congress to give it an excuse for not doing anything to meet our real needs.
Krugman says that what matters is not the overall level of the debt, but the comparison between the cost of servicing it and our ability to pay. And he points out that right now “. . . federal interest payments are only 1.3 percent of GDP, low by historical standards.”
But, if platinum coins were used to produce reserves needed for spending appropriations, then the Treasury would, in effect, be generating necessary reserves, at its discretion, to spend, and there would no longer be an issue about ability to pay interest because there would be no interest to pay. Putting the issue in terms of Krugman’s measure of ability to pay; interest payments of 0.0 percent of GDP, are even lower than interest payments of 1.3%.
Nor would the issues of long-term interest rates, or inflation-protected bonds, or rising costs of borrowing arise in the platinum coin scenario. All these worries of Krugman and Washington DC’s finest just go away if the Treasury is able to get its own reserves issued by using platinum coins rather than issuing bonds.
Krugman also considers other objections to borrowing and investment spending. The first is the view that the government can’t do anything right. He is right in pointing out that history gives the lie to this bit of neoliberal dogma.
And he dismisses specific examples of failures like Solyndra by pointing out that all large organizations including private sector ones have their project failures. And then he goes on to point out that the solar and wind projects promoted by the Obama Administration have “. . . been a huge success, with a rough quadrupling of production since 2008. Green energy should be seen as an inspiration, not a cautionary tale.” He concludes by saying that there is “. . . an overwhelming policy case for federal borrowing to pay for public investment.”
Krugman is right about the federal government paying for public investment, but not about the overwhelming policy case for federal borrowing to make this happen. This is, first, because the relative effectiveness of federal investment spending would not be affected by the method used to fill the Treasury’s purse. Whether the spending is facilitated by borrowing or by platinum coin seigniorage makes no difference to the success of projects.
And second, it is because using the seniorage method would end the influence of debt mongers who are always claiming faux funding crises are besetting various parts of the government, such as Social Security and Medicare that they would like to privatize or eliminate.
Of course, there are a host of objections to using platinum coin seigniorage. And I haven’t discussed them in this post. An extensive list of them is provided in my 2013 – 2014 e- book which covers inflation risks, legal, political, economic, and institutional objections to using platinum coin seigniorage to facilitate Treasury spending. Interested readers can review the objections and my rebuttals to them in the book.
Assuming that none of the objections, including the claims of likely inflation, are valid, Krugman’s “Time to Borrow” becomes “Time to Spend on Public Investments” without worrying about how we can pay for it. We simply can. It’s in the Constitution and it’s in the law authorizing platinum coin seigniorage.
And it means that the time to spend on public investments is whenever the government needs to do that, and Congress appropriates the spending. It also means that it is not the current low interest rates on federal bonds that makes this a particularly opportune time to invest, but only the government’s ability to pay which for a monetary sovereign nation such as the United States is always unlimited. Since that ability to pay never changes, there is never a time that is more opportune than any other for public investment, provided only that the real resources are available in our economic system.
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The claim that “the danger of inflation by generating reserves from issuing platinum coins is no greater than the danger of inflation by generating reserves from issuing and selling Treasury interest-bearing bonds” requires an explanation simpler than reference to a book. “Generating reserves from issuing platinum coins” increases both the assets and liabilities of the Federal Reserve by the value of the coin. “Generating reserves from issuing and selling Treasury interest-bearing bonds” leaves the assets and liabilities of the Federal Reserve unchanged. We need a simple explanation why an increase in the assets and liabilities of the Federal Reserve is not inflationary — even under strict adherence to the principles of Modern Monetary Theory.
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Hi David, Nice to see you here. First, when the Mint deposits a high value platinum coin at the Fed, the Fed must issue reserves “created out of thin air” to the Mint’s Public Enterprise Fund account, and in doing that swaps the reserves for the coin, which in the Trillion Dollar coin example would sit in the NY Fed’s vault. The swap is one of reserves (financial assets of the Fed) for the coin (a financial asset of the Treasury). So, at that point in the action we’re talking about a swap of financial assets of equal face value. The increase in the assets of the Fed occurs in the act of creating the reserves as it marks up the Mint’s PEF account.
Now, the assets produced by the Fed and the Treasury in accordance with the powers granted to them by the Congress don’t become liabilities of the government until they are spent into the economy. So, if the Treasury has a $100 Trillion coin minted and the Fed swaps that out for $100 T in reserves then the coin sits in a Fed vault and has no effect on the economy. The reserves produced by the Fed aren’t inflationary as long they sit in accounts of the Treasury including the PEF account.
They become inflationary when they are used to deficit spend into the non-government sector of the economy. But if this sector is not operating at full capacity, then the inflationary impact of the reserves will only counter deflation, and not generally cause inflation in the private economy, though there may be some inflation to the uneven distribution of economic activity across the economy.
When the reserves are used to pay back debt as it falls due, the Treasury is only swapping reserves for its debt instruments a change in portfolio distribution of assets, but not in net financial assets. So, the use of these reserves to repay debt should not be inflationary because it doesn’t lead to increased net financial assets in the non-government (including the private) sector).
Finally, any reserves generated by the Fed that cannot be spent by the Treasury because Congress has not generated appropriations for spending would just continue to sit in the Treasury spending accounts until Congress does appropriate the spending. So, these reserves, since they are not spent into the economy cannot be inflationary because they won’t add to demand until they are used to implement Congressional appropriations. There is no causal channel for them to increase inflation.
Btw, the reason why, the use of reserves for deficit spending without issuing debt should be no more inflationary then their use with corresponding debt issuance is because the shifting of reserves to the Treasury to buy Treasury debt instruments takes “money” out of the economy, but not net financial assets. So, if holders of the debt want reserves to use for various purposes, they can either sell their debt instruments to in the private market or to the Fed if it is doing OMO or QE, or alternatively they can borrow the reserves they need by using the debt instruments as collateral. Since, at times, the debt instruments can be leveraged more than once in loan transactions, and since the private banks create deposits (reserves) when they make loans, debt instruments can actually cause more expansion of the money supply then reserves. So, counter-intuitively, Treasury debt issuance may be more inflationary than Treasury money generation through seigniorage.
Finally, I’m not sure what you mean by strict adherence to the principles of Modern Monetary Theory. Whether an increase in the Fed’s balance sheet is inflationary or not depends on what the Fed does with its assets. If it doesn’t spend them an expanded balance sheet should not be inflationary. If it spends them in swaps for assets of equal value, then again that should not be inflationary. But, finally, if if it swaps reserves for assets that are worth less than the reserves, then it will be inflating the value of net financial assets in the private sector, which it is not supposed to do according to law because that is a fiscal operation outside the scope of its legal mandate.