Thursday, July 28, 2011

Sad Day for my Constitutional Debates

The Debt Ceiling is constitutional, demands massive inflation after August 2nd if we don't fix it, and I am a fail at thinking.

Unfortunately, when considering the legal options for making payments on our obligations I made a rookie mistake.  Brad DeLong cleared things up for me, with help from Yglesias. I forgot that the United States Government is not anything like businesses or households with respect to its finances.  It holds debt in a currency that it has the legal authority to print.  Sadly, this deeply undermines all of my earlier arguments re: constitutionality:

  1. Because we can print the money that our debt is in, we need not ever default on our debts.  We can simply print money to satisfy them.  Therefore, the debt limit does not specify a mandatory legal point of default, but instead specifies a mandatory legal point of printing money to pay for things.
  2. Because of 1, there is no reason to believe that in passing laws of a certain cost, congress intended to pay for it through borrowing rather than money printing, ergo, making a decision to borrow rather than print money seems clearly to be out of the powers of the presidency.
To add insult to injury, all this implies that there IS a legal way out of this mess if we don't raise the debt ceiling, and since it's the only way I can figure out that doesn't require us to either default (unconstitutional), fail to pay our obligations (illegal), or borrow more money (illegal), we actually have to do it.  Unfortunately, that way is to cause massive inflation and behave like a banana republics or a failed state.

Now, lots of smart people think a little inflation might be nice for our economy right now, but somehow I don't think a shot of a couple trillion new dollars straight into the pockets of real people doing actual spending (rather than, say, giant and growing uninvested bank reserves ala QE1&2) is the safest way to do it.  Either way, I can't imagine our creditors will be thrilled with the whole "let me print you some money for that bill" strategy, so it would probably do bad things to our borrowing ability in the future, but it seems like the only legal way out.  THIS IS STUPID.  

Dear Congressional Republicans, I fire you.  Love, Rory.

P.S.  On an Ironic note, the Gold Bug Anti-Inflation Hawk Republican Congress may be forcing us to adopt highly inflationary policies.  I love politics.


  1. This comment has been removed by the author.

  2. There are two other possibilities: close down federal programs which are not obligated by law, and sell assets purchased by the government and the EPA. I don't know how realistic these are or how far they would go, but IMHO paying light bulb regulators to enforce energy efficiency laws, subsidization of construction and regular maintenance of wind turbines, and things of that nature are not legitimate functions of national government.

    It is unfortunate that the "pay-as-you-go" government from 2008-2010 was unable to make tangible progress toward balancing revenue and spending measures while at the same time increasing both the debt and the deficit; and lacked the constitution to increase revenue when Democrats had a supermajority in both houses and control of the executive branch. The "stimulus" was a gamble at best and now we have to pay for it.

    Let's see substantive, unambiguous proposals from both parties in writing so we meaningfully understand what both parties agree upon and where both parties disagree, rather than relying on "slurpie summits" and good intentions to get things done.

  3. Yeah, though the existence of those entities are created by law their funding is "discretionary" and I guess that means we can defund them to some extent (though I'd be surprised if they didn't have some minimum staff required by law), and we can certainly sell assets (provided people are willing to buy them), but neither of those things solve the problem to the tune of the ~100 billion dollars we'd need in August.

    As for the stimulus, Brad DeLong has an interesting post documenting its effect. I agree that the Democratic supermajority should have enacted future taxes, but held back on them for the same reason the stimulus included tax breaks... taking money out of the economy hurts it and we were and are in a bad place economically (which is why we shouldn't be rushing to take money out of the economy now either... see any depressed nation in Europe for examples of how "great" austerity measures are for recoveries). That said, there's an easy revenue booster down the line. When the Bush tax cuts expire, Democrats can do nothing. Then taxes will go up and revenues will return to something similar to historical levels.

    I'd love to see some law from both parties, but honestly, I think both parties' economic positions are rather clear. Republicans want to disincentive laziness by removing government subsidies to protect the well-being of the poor, and they want to reduce taxes on corporations and the wealthy. Both parties want to simplify the tax codes to remove loopholes, though when asked for the specifics the only agreement seems to be on ethanol subsidies (which are real dumb). Both parties want to get out of the wars (finally). Democrats want to raise effective tax rates to pre-Bush eras, guaranteeing the funding necessary to maintain the social safety net for another 70 years or so.

  4. Argh. meant to link. It's not Brad DeLong, but Ezra Klein:

    Very interesting way to look at the stimulus.

  5. Klein is interesting, but in my opinion during a down economy of any kind, it's not necessary for people to buy new cars, new houses, etc. You don't need to impound "clunker" energy-inefficient vehicles. You don't need to "bail out" automobile industries which have a normal bankruptcy process for removing toxic assets. You don't need to provide funds for banks whose CEOs are getting bonuses while the banks are going broke.

    Government can subsidize construction of infrastructure which could generate long-term job growth, but I'm highly skeptical that it can "save" entire economies, especially given that all markets have cycles where they are up or down. It can try to accelerate us into the next up cycle (or bubble) but this will inevitably lead to a down cycle.

    Democrats want to raise effective tax rates to pre-Bush eras, but aren't interested in slashing tax credits and don't appear to have strong opinions about consequences on smaller businesses which create jobs by addressing market inefficiencies but lack the economies of scale large mega-corporations have.

  6. Lots of stuff in your comment, let me see if I can't pick out the various things. First of all, recessions are generally characterized by depressed demand. If money isn't flowing in the economy, people lose their jobs, which reduces the amount of money flowing in the economy, which makes people lose their jobs &c. So the government tries to encourage people to use their money, and tries to put money in the hands of people who are willing to use it (instead of sit on it). If more people spend money, businesses try to make more stuff, they need people to do it, so they hire them, which gives them more money &c.

    The automobile industry bailouts provided the industry with the solvency necessary to keep on their employees while restructuring their businesses to be more effective. All the money got paid back (or is on track to be paid back early) and they're now turning profits, so it worked. And as an added bonus, all those people stayed employed, which let them continue to spend money and contribute to the economy (as well as feed their families and silly things like that).

    As for banks. If they crash the economy crashes, period. I agree that they shouldn't have been paying their CEOs so ridiculously, but frankly, tons of businesses and people relied on banks holding their money effectively. If we'd allowed them to fail, we would have stabbed our economy right in the heart. That's why Dodd-Frank is so important. It basically tries to set up viable bankruptcy proceedings for super large banks so that in the future we don't have to bail them out or watch our economy bleed out. Of course, in order for that to work, we'd have to actually let the bill do its job.

    There do seem to be areas where Democrats want to slash tax credits, and progressive pundits like krugman, klein and yglesias have even more tax credits in mind. I'm not sure which things in particular you see as hurting smaller businesses, but that might be evidence that you're right and the left doesn't focus on those issues. Or I may just be unaware of the relevant discussions.

    I agree that government should be involved in infrastructure. I also agree that it shouldn't try to put us into bubbles, but it seems that good policies should allow us to recover more quickly from recessions, and maybe even permanently accelerate our growth. Doing the latter has been the goal of economists for the past few decades, and no one seems to have worked it out, though the Bush Tax Cuts were one of the most ambitious attempts (from a supply side perspective).