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Money and Unemployment | | | But is this view correct? Did the millions of productive workers who stopped getting out of bed in 2007 all transform into socially repugnant, Kafkaesque beetles? Did we collectively exhaust our supply of that precious job-creating element, “employaminium”? Of course not. Unemployment is a legal creation arising from an accounting system that records claims on real value in nominal amounts. Nothing in the natural world prevents individuals from contributing to the betterment of society. | |
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< | As prospective lawyers, it is our job to learn how to solve legal problems. To that effect, we might do better by spending less time considering the Econodwarf’s orthodox dogma as axiomatic truth and more learning about how creative lawyers devise out-of-the-box solutions to pressing economic problems. One example of such legal creativity is blogger-lawyer Carlos Mucha (a.k.a. Beowulf)’s brilliant proposal to take advantage of a little known but hugely important provision in the Coinage Act that completely eliminates the need for the government to issue interest-bearing treasury debt during the presently convoluted process of deficit spending. 31 U.S.C. 5112(k) authorizes the Secretary of the Treasury to mint platinum coins “with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe.” Under the clear wording of this statute, the Treasury tomorrow could create and deposit at the Federal Reserve a single $60 trillion coin to pay for the national debt, universal Medicare, universal education and a minimum wage job guarantee, while still leaving a very-publicly-visible $40+ trillion in its checking account for a rainy day. Of course, such a move would not be a panacea for every social and economic problem. However, it would effectively eliminate the distracting question of government “funding” and allow us to focus on the truly political and messy issues of policy design and implementation. | >
> | As prospective lawyers, it is our job to learn how to solve legal problems. To that effect, we might do better by spending less time considering the Econodwarf’s orthodox dogma as axiomatic truth and more learning about how creative lawyers devise out-of-the-box solutions to pressing economic problems. One example of such legal creativity is blogger-lawyer Carlos Mucha (a.k.a. Beowulf)’s brilliant proposal to take advantage of a little known but hugely important provision in the Coinage Act that completely eliminates the need for the government to issue interest-bearing treasury debt during the presently convoluted process of deficit spending. 31 U.S.C. 5112(k) authorizes the Secretary of the Treasury to mint platinum coins “with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe.” Under the clear wording of this statute, the Treasury tomorrow could create and deposit at the Federal Reserve a single $60 trillion coin to pay for the national debt, universal Medicare, universal education and a minimum wage job guarantee, while still leaving a very-publicly-visible $40+ trillion in its checking account for a rainy day. Of course, such a move would not be a panacea for every social and economic problem. However, it would effectively eliminate the distracting question of government “funding” and allow us to focus on the truly political and messy issues of policy design and implementation. | | | Conclusion | | | First, despite conventional wisdom to the contrary, the difference between a treasury bill or bond (i.e. government “debt”) and other forms of risk-free government liabilities (federal reserve notes and reserves) is very little – essentially, a small degree of liquidity (you can't use a bond at the local grocery store) and the rate of interest. Indeed, since the Federal Reserve began paying interest on excess reserves in 2008, even that difference has largely evaporated. To that extent, if the Treasury were to create a large platinum coin, deposit it at the Federal Reserve, and use the funds credited to its reserve account to purchase all outstanding government debt (or alternatively, to fund future spending in lieu of issuing new debt), the effect from an accounting perspective on bondholders would be very little, akin to an individual moving deposits from an interest-earning savings account to a checking account at a regular bank. As Warren Mosler explains here, it is quite possible, not withstanding the effect of such a policy on the long-term interest rate (which is already quite low!), that such a move would actually exert a net deflationary impact due to the removal of government interest income from the private sector. Of course, it is possible that there would be (irrational) expectational inflationary effects from announcing the printing of a $60T coin, but from a purely accounting perspective there is no reason for that to occur. My real goal with that suggestion was to throw a bucket of water over this ridiculous notion that governments with their own currency can “go broke,” or perhaps even more worryingly, that they need to “borrow” money they have already created in order to deficit spend. | |
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< | Second, I'm not sure why you think that funding all social programs through printed money will cause very high inflation or even render it a likely outcome given the U.S.'s institutional arrangements, productive capacity and the huge demand slump we are currently living through. It is possible that we would experience a temporary increase in inflation at the point of introducing universal public education, medicare and a minimum wage job guarantee. However, given the effect such policies would have on constraining rising healthcare and college education costs, not to mention the increase in productivity that would result from a fully employed workforce working on things like infrastructure, environmental renewal and community-redevelopment (or as some have called it, a “Green New Deal”), it is unlikely that such inflation would persist beyond the initial adjustment shock. Of course, if it were to occur and become a significant problem, one could temper demand through a range of measures, including targed tax increases (which would be explicitly serving an aggregate demand-managing function rather than a revenue-raising function), increased interest rates, or higher capital requirements/reduced leverage ratios on bank lending. In short, there are plenty of ways to deal with the issue of high inflation should it occur without dismissing the unique policy freedom afforded to monetarily sovereign nations by seignorage power. | >
> | Second, I'm not sure why you think that funding all social programs through printed money will cause very high inflation or even render it a likely outcome given the U.S.'s institutional arrangements, productive capacity and the huge demand slump we are currently living through. It is possible that we would experience a temporary increase in inflation at the point of introducing universal public education, medicare and a minimum wage job guarantee. However, given the effect such policies would have on constraining rising healthcare and college education costs, not to mention the increase in productivity that would result from a fully employed workforce working on things like infrastructure, environmental renewal and community-redevelopment (or as some have called it, a “Green New Deal”), it is unlikely that such inflation would persist beyond the initial adjustment shock. Of course, if it were to occur and become a significant problem, one could temper demand through a range of measures, including targed tax increases (which would be explicitly serving an aggregate demand-managing function rather than a revenue-raising function), increased interest rates, or higher capital requirements/reduced leverage ratios on bank lending. In short, there are plenty of ways to deal with the issue of high inflation should it occur without dismissing the unique policy freedom afforded to monetarily sovereign nations by seignorage power. | | | | |
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< | Notwithstanding all of that, the suggestion of a $60T coin has always been partially tongue in cheek, and I don't think anyone, even Constitutional Law Scholar Jack Balkin – who seems to think the idea would work – is suggesting it should form the basis of long-term economic policy. But I don't think the problem with it is that it is unconstitutional (what is your basis for this claim?), or that there is any inherent problem with giving the President power over monetary and fiscal policy (given that they are inextricably linked to the point of being “two sides of the same coin” as it were). Rather, the biggest problem with it, in my opinion, is that even the act of depositing a coin at the Federal Reserve to is unnecessarily complicated compared to a true system of functional finance, with money injected through deficit spending, removed through taxation, and interest rates set through paying interest on publicly available accounts at some form of public bank (perhaps linked to social security numbers and/or corporate tax numbers). | >
> | Notwithstanding all of that, the suggestion of a $60T coin has always been partially tongue in cheek, and I don't think anyone, even Constitutional Law Professor Jack Balkin – who seems to think the idea would work – is suggesting it should form the basis of long-term economic policy. But I don't think the problem with it is that it is unconstitutional (what is your basis for this claim?), or that there is any inherent problem with giving the President power over monetary and fiscal policy (given that they are inextricably linked to the point of being “two sides of the same coin” as it were). Rather, the biggest problem with it, in my opinion, is that even the act of depositing a coin at the Federal Reserve is unnecessarily complicated compared to a true system of functional finance, with money injected through deficit spending, removed through taxation, and interest rates set through paying interest on publicly available accounts at some form of public bank (perhaps linked to social security numbers and/or corporate tax numbers). | | | | |
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< | Of course the political issues with truly democratizing money are, as you mentioned, a crucial consideration - probably the crucial consideration, if we are to listen to Kalecki or take seriously Eben's suggestion that those things left unspoken are usually the most important. But outside of those who, like yourself, have formally studied economics, how many average people do you think are aware now that banks do not “lend deposits” as the traditional model suggests, but rather “create deposits through loans” through the process described by heterodox economists as “endogenous money?” Do you think the average person would be happy with the fact that the credit-expanding power, with all of its inflationary potential, is today wielded largely by the private banking industry under licensing regimes, rather than utilized directly for the public purpose? Personally, that revelation was shocking to me and continues to represent one of the largest cancers on our economic system, as it relies upon interest-earning debt to expand economic growth, resulting over time in an exponential transfer of wealth from debtors to creditors. | >
> | Of course the political issues with truly democratizing money are, as you mentioned, a crucial consideration - probably the crucial consideration, if we are to listen to Kalecki or take seriously Eben's suggestion that those things left unspoken are usually the most important. But outside of those who, like yourself, have formally studied economics, how many average people do you think are aware now that banks do not “lend deposits” as the traditional model suggests, but rather “create deposits through loans” through the process described by heterodox economists as “endogenous money”? Do you think the average person would be happy with the fact that the credit-expanding power, with all of its inflationary potential, is today wielded largely by the private banking industry under licensing regimes, rather than utilized directly for the public purpose? Personally, that revelation was shocking to me and continues to represent one of the largest cancers on our economic system, as it relies upon interest-earning debt to expand economic growth, resulting over time in an exponential transfer of wealth from debtors to creditors. | | | Finally, in regards to “ignoring the other branches of government” - I am not sure exactly what you mean by this. Congress still has to appropriate money before it is spent, regardless of whether it is created through a coin or through debt issuance, so i'm not sure how oversight in that sense would be undermined. Can you explain further your concern here? | |
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< | P.s. Ron Paul wasn't the only one proposing getting rid of the Federal Reserve as we know it. | >
> | P.S. Ron Paul wasn't the only one proposing getting rid of the Federal Reserve as we know it. | | | -- RohanGrey - 11 Jun 2012 |
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