Those platinum coins...

I’m deeply disappointed.  Maybe even depressed.  Ezra Klein spilled cold water yesterday on what had been a truly fun fantasy.  I never really believed that it would happen, because it was simply too perfect.  Not just as a means of avoiding the debt ceiling crisis, although it was a brazen but acceptable solution for that.  It was perfect as an economics lesson.  It would have made at least one difference between government budgets and family budgets so vivid that no one could miss it, or misconstrue it.

For those who have not been following with trembling anticipation the preparations for the coming debt ceiling confrontation, there has been a huge discussion in the blogosphere about the possibility of having the Treasury simply mint a coin with a face value of $1 trillion, and deposit that coin in its account at the Federal Reserve.  The federal government could then use that money to pay the nation’s bills while the Congress endlessly debates the debt ceiling issue.  This possibility has enchanted the Democrats and enraged the Republicans, because the Republicans have been counting on the threat of national default to give them “leverage” (their word!) in budget debates.

The trillion dollar coin sounds like a bad sitcom or a crazy punch line, but it isn’t.  Many respectable thinkers, including Paul Krugman, Nobel laureate economist, have come out in favor of it.   Krugman has said that it’s the only legal course of action available once the debt ceiling truly binds.  (I use that phrase, “truly binds”, because technically we are already past the debt ceiling date.   The Treasury is now using “extraordinary measures” to pay the bills.   But it will run out of measures of any kind to use in about a month and a half, and after that it will not be able to pay the obligations it already has, and the government will not be able to perform the functions that Congress has already said in its budgets that the government must perform.)

It’s true that we’re into strange legal territory once the Treasury is truly out of options.  That would mean that the Executive branch, without the help of Congress, would have to decide what bills to pay and what to defer or default on.  The executive branch would have to decide which programs to continue and which to abandon.  I don’t know what legal authority they have to do that.  Maybe some legal scholar out there can enlighten me.  But they can’t spend money they don’t have, can't borrow and won't create, and they can’t abandon the obligation that Congress placed on them to spend the money either.  The 1974 Impoundment Control Act forbids that, doesn’t it?  The budgets that Congress passes, including the continuing resolutions, aren’t just suggestions.  They are laws.

So what do they do?  Ahh…and along comes the platinum coin, a legal opening that would enable the executive branch to obey all the laws that Congress has bound it with, and give us all a good laugh at the same time.

That the platinum coin idea is legal is nearly beyond question, although by a fluke.  As part of the 1997 appropriations bill Congress provided the Treasury with permission to mint platinum coins in any denomination they see fit.  The intent was for the Treasury to mint coins in very small denominations so that coin collectors with modest incomes could buy them, and the bill’s sponsors never imagined that these coins could be used to fund the government in a significant way.   I have no doubt at all, though, that they did understand that the Treasury would make money by doing this: the coins don’t have to have anything close to their face value in real platinum, and would be sold at prices far above their cost to produce.  Coin collectors, the bill’s sponsors thought, would buy them because they were unique, official issue, and distributed in mint condition.  And I have no doubt that they understood that any money the Treasury made by this process could be used to reduce the Treasury’s need to raise money through taxation or borrowing.  They just never imagined that the Treasury could mint coins of this value, or deposit them at the Fed. But whatever they thought, this law is the creation of Congress, and Congress has every right to enact it, under the authority granted to it by the Constitution.  Article I Section 8, if you’re curious, gives Congress the authority “To coin Money, regulate the Value thereof…” and a bunch of other things.

And of course, that’s why I liked the idea: it’s both completely legal and unboundedly, hilariously, absurdly clarifying.  Because even though the phrase thrown around on blogs over the last few weeks has been “trillion dollar coin” there’s no legal reason we would have to stop there---or stop with just one.  Why not mint a $100 trillion coin, or a $100 quadrillion coin?  Why just kick the can a few months or years down the road?  Make a deposit to the Fed that would eliminate the need for a debt ceiling debate for the rest of the century.  Minting a mess of trillion dollar coins and depositing them at the Fed would make it very clear that there is no legal constraint on the federal budget, and that this lack of any constraint is one more reason that the federal budget is not like a family budget.  It would clarify the truth that the federal government does not borrow to fund its activities because technically it doesn’t really need to borrow, or tax either, to pay for things.  The federal government, specifically Congress, has the power to coin money anytime it wants, so technically there is no binding federal budget constraint, short term or long. 

So why does the government choose to tax or borrow rather than just create money to fund its activities?  Or more exactly, why should they choose between these options?  Because each of them has different economic implications for the world outside the government, for the national and even the global economy, and because the government, while not bound by a constraint in the same way the rest of us are, is bound by the pursuit of competing economic goals.   The government, if it is sensible, taxes or borrows or creates money from thin air, choosing each method of finance when that is the method that best promotes the health of the nation as a whole.

Many people argue that money creation, if carried on with excessive abandon, leads to inflationary pressure, or that excessive debt can limit future policy options.  Governor Perry was so convinced of the first that he suggested that Ben Bernanke, the Fed Chairman, would be “treated pretty ugly” if he came to Texas after expanding the money supply.  And of course the latter, the debt issue, is the drum that the house Republicans have been beating with all the vigor they can muster.  That is the drum they plan to beat again when their maximum leverage on the debt ceiling arrives.  They are so eager to avoid debt catastrophe in the distant future that they are willing to create catastrophe today as a cure (although only if we can solve it through reductions in spending on Social Security or Medicare, not through new revenues!)

I don’t want to spend time arguing the merits of either of those beliefs right now.  For what it’s worth, I agree that excessive debt can chafe even governments who control their own currency, but I don’t agree that we are at or approaching that level of debt yet. I agree that in normal circumstances excessive money creation can excessively stimulate the economy and lead to inflation, but expanding the money supply right now is not having that effect: a great deal of the newly created money is sitting idle, rather than stimulating the economy. 

But the point I’m making here is that these concerns are clearly and explicitly different from the concerns of the average family trying to make ends meet, or of a business balancing its books. The average family cannot create the money they spend, and their first priority is the welfare of their own family, rather than the health of the economy outside their doors.  A business pursues profits for its owners, and perhaps of its employees and customers, but it generally doesn’t actively pursue the interests of people unrelated to its own operations.  A national government, by contrast, can create money, and its goals, the whole reason for its existence if it is a good government, is to protect and expand the welfare of people outside the government itself, to promote the general welfare of the whole nation.

But in yesterday’s column Ezra Klein reported that the Treasury has ruled out the platinum coin idea.  They will not mint such coins, and if they did the Fed would not accept them.   So the sitcom is cancelled, and the Treasury has officially stepped on the punch line.  The ubiquitous use of the family-budget or business-budget analogy for federal choices will not be disturbed, and those who use them will not be disconcerted by a ludicrous, clarifying moment.