Are you kidding me?!?!

This post will wander around, but eventually address my heterodox monetary views.

Ryan Avent and Matt Yglesias have some recent posts discussing transformative technologies such as the automobile.  At first no one expects them to be transformative, as none of the infrastructure exists to make them much more than a plaything for rich people.  For every ten inventors claiming their invention will transform society, perhaps one will actually be successful.

This made me start to think about how ideas that were once viewed as zany gradually become accepted by society.  In some cases it might seem obvious—scientific theories are accepted because they are true. (I’d say useful and/or elegant.)  What about moral innovations?  The first time I heard people discuss gay marriage I was incredulous.  Not so much because I thought it was a bad idea (I am a libertarian, after all) but rather because I thought there was no way American society would ever accept such a preposterous idea.  I was wrong.

Now we get into murky philosophical waters; moral realism vs. moral relativism.  Is moral innovation different from scientific or technical innovation?  Is the moral acceptability of gay marriage now true in the way that the theory of evolution is now true?  Something accepted by “the smart set?”

The trillion dollar coin is back in the news, with recent posts by Paul Krugman and Matt Yglesias discussing this option.  I basically agree with both of them; the debt ceiling itself is such a logical monstrosity that any zany gimmick like the trillion dollar coin is fair game.

But it’s also obvious to me that most people would not agree, especially the VSPs, but also average people.  When most people think of coins they think of nickels and dimes, the lowliest part of our vast financial system. There is something slightly absurd about combining the number “$1 trillion” with a coin.  Most people don’t understand fiat money, or open market operations, or public debt.  But they have a vague idea that the German hyperinflation had something to do with currency notes of “100 billion German marks.”  So the trillion dollar coin isn’t going to work.  The public would greet the idea about the way that John McEnroe used to greet bad line calls:

You cannot be serious!

And that’s also how most economists would react if they heard my theory that the banking/real estate crisis didn’t cause the Great Recession, it was ultra-tight money by the Fed.  Is there any chance I can convince other economists that I am right?  Yes there is.

One needs to break the theory down into three components:

1.  Money is tight when NGDP growth and inflation fall sharply below target, not when the money supply falls or interest rates rise.

2.  Under fiat money the Fed can always boost NGDP if it tries hard enough, even if the economy faces lots of “headwinds.”

3.  The recession was mostly caused by a big fall in AD, although real factors such as reallocation out of housing might have played a modest role.

If all three assertions are true, then my zany theory is true.  And I think I have a fighting chance to convince economists on all three counts.  For the first, I can quote Ben Bernanke.  Say what you will about Bernanke, but he is not a zany economist like I am.  He’s very serious, very respected.  For the second item you use reductio ad absurdum arguments.  You cite Zimbabwe, you discuss the expectations channel.  You point out that in all of recorded history no fiat money central bank has ever tried to inflate and failed.

The third might be the easiest.  Lots of conventional economists think the recession was due to a demand shortfall—many supported fiscal stimulus.

So it’s a long shot, but none of the three components of my argument are completely beyond the pale.  It’s just when you put them together, people get all John McEnroe-ish

PS.  Actually the stock of lowly coins (during normal times) is about equal to bank reserves, and just as important.  The total amount in circulation is roughly $120 per capita.  We could completely eliminate paper currency and still have enough transactions media to grease the wheels of commerce—except that people hoard coins.

Seriously.  No kidding.

PPS.  When people say something is true, they might mean:

1.  ”It’s generally regarded as true.”

2.  ”I predict it will be regarded as true in the future.”

3.  ”It is regarded as true by God.”

But most people seem to define ‘true’ differently.  They think it means  . . . well I’m not quite sure what they think it means.


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74 Responses to “Are you kidding me?!?!”

  1. Gravatar of Felipe Felipe
    5. January 2013 at 08:36

    You keep using that word…
    http://www.youtube.com/watch?v=G2y8Sx4B2Sk

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. January 2013 at 08:57

    ‘…the debt ceiling itself is such a logical monstrosity that any zany gimmick like the trillion dollar coin is fair game.’

    Only if you think that the Constitution itself is a ‘logical monstrosity’, as it requires congress’s approval to borrow.

    The people who wrote and ratified it had a healthy distrust of power, so they deliberately made it difficult for the central government to get anything done. Which has worked better, for about 2-1/2 centuries, than anyone else’s bright idea of how to organize government.

    I think that any American worth his salt ought to be deeply distrustful of any gimmicks used to get around the Constitution’s difficulties. They’re there for good reasons.

  3. Gravatar of ssumner ssumner
    5. January 2013 at 09:04

    Patrick, Sorry but there is nothing unconstitutional about trillion dollar coins, they were authorized by Congress. It’s insane for Congress to give the executive taxing and spending instructions that force borrowing, and then not allow borrowing thus forcing a default. Any constitutional way around that insanity is fair game.

  4. Gravatar of K K
    5. January 2013 at 09:22

    Scott,

    “my theory that the banking/real estate crisis didn’t cause the Great Recession, it was ultra-tight money by the Fed.  Is there any chance I can convince other economists that I am right?”

    Shouldn’t be too hard. Keynesians, whether old fashioned ISLM or New Keynesians, already believe this. The problem is that in a liquidity trap it is impossible to lower the real rate to the natural rate. Ie monetary policy *is* too tight but there is nothing the monetary authority can do about it. So there is no disagreement here. The only difference, as far as I can tell, is that you believe that sufficient QE, independent of the asset class, can pull you out of the liquidity trap (by raising the natural rate?). This is a complex issue and a topic of legitimate debate.  But your characterization of everyone except market monetarists as not understanding that we have deficient monetary policy is simply wrong. 

  5. Gravatar of Jim Glass Jim Glass
    5. January 2013 at 09:27

    “the debt ceiling itself is such a logical monstrosity”>/i>

    No, it’s not. The debt ceiling derives from the Constitution, which explicitly provides that borrowing by the govt must be authorized by Congress. (Which is a very good provision, unless you want the president to be legally able to personally invoke the nation’s credit to fight wars and for other personally-motivated purposes, as the kings of the 1780s routinely did.)

    For the first 125 years every debt issue was individually authorized by Congress by separate vote.

    Then with all the borrowing of WWI, the debt ceiling process was adopted to make it easier to borrow. And for near 100 years after that it functioned smoothly with no problems. So what kind of “monstrosity” could it be? And really, what’s so “illogical” about it?

    The problem with it began only when we started **endlessly massively increasing the debt** by running up huge spending programs that **we don’t want to pay for**. That is: the problem is not in our debt ceiling, it is in ourselves!

    For 220 years the debt ceiling or much tougher provisions functioned with no problem. Now, for the last five years, *we* can’t get along with it. Is the problem it or us?

    In any event, anyone who wants to get rid of the debt ceiling must offer up an alternative mechanism to meet the Constitutional requirement. Of all the people who routinely damn the debt ceiling, I’ve never seen anyone do that. So that better form of authorization would be … ?

    Note well, that there is nothing at all “logical” in “authorization to spend money = authorization to go into debt to do it”. Not in households, surely not in business, and never was in USA government and politics, until the idea started floating in our generation among us … since we all want that spending so much.

    The fact that it now *has* in our politics just shows how we’ve all changed our psychology to favor our spending habits. How we’ve re-framed how govt spending works in our own minds. We don’t even want to *look at* the massive amounts we need to borrow to keep our spending up — make the borrowing automatic! so we don’t have to even see it!

    And I have to say, seeing this coming from the those with small-government/libertarian leanings is bizarre.

    Put aside the fact that they shouldn’t want to give the executive a black-ops credit line to fund all the black-ops spending lines it has already grabbed for itself, and make them grow so much faster. Just consider the fiscal issue.

    Shouldn’t small-government/libertarian types *want* Constitutional restraints on spending and the endless growth of govt — especially debt? How does this become a bad, illogical, “monstrosity” thing? How many other restraints on growth of govt do they have?

    Is this really yet another part of the Constitution they want to throw overboard?

  6. Gravatar of Morgan Warstler Morgan Warstler
    5. January 2013 at 09:39

    4. Real growth starts with productivity gains.

    I’d make this #1. It gets everyone’s brain focused on what is most important. Then your 24 are easier to slide past folks.

    RGDP is always PREFERABLE to inflation. And the more you repeat that part, infuse it into your arguments, the more rational you will sound.

  7. Gravatar of W. Peden W. Peden
    5. January 2013 at 09:44

    Jim Glass,

    “Shouldn’t small-government/libertarian types *want* Constitutional restraints on spending and the endless growth of govt — especially debt?”

    Except the debt ceiling doesn’t restrain the growth of government, including the growth of government debt. That’s the stated intention behind the debt ceiling, but it’s not what it does. The main result of the debt ceiling is to obscure responsibility for taxation and debt.

  8. Gravatar of Jon Jon
    5. January 2013 at 10:05

    Scott,

    The debt ceiling is not intrinsically illogical. It is the 1974 budget act that made it so. In the shadow of watergate, congress proported to make appropriations mandatory. Prior to this we had three things:

    - authorizations to spend money on certain purposes
    - authorizations to collect tax
    - authorizations to issue debt

    Within each the executive had discretion to act until the 1974 act. So What isn’t sensible is to claim that the money must be spent but not allow for the funds to be raised.

    Congress recognized this in 1985, and passed an automatic sequester mechanism which the courts struck down because it was triggered by the GAO which was consider a usurpation of the executive. In 87, this was remedied by giving the authority to the OMB. This did not succeed in constraining the deficit though because congress annually set the limits generously until the ’94 republican revolution. Then the mechanisms were in place and the OMB used recession authority to keep spending within the debt ceiling rachet congress established.

    Then in 2002, this entire structure was voided to allow for the bush tax cuts and the 9/11 defense build up to coexist.

    So the solution here is not to attack the existence of the debt ceiling but the missing automatic sequester mechanism and glide path for reducing the deficit to surplus by the peak of the business cycle.

  9. Gravatar of john john
    5. January 2013 at 10:53

    Congress implicitly authorizes borrowing when it authorizes spending that requires borrowing.

    If Congress doesn’t want the government to borrow, it can stop passing spending bills.

  10. Gravatar of Tim Caswell Tim Caswell
    5. January 2013 at 11:16

    You said: “But most people seem to define ‘true’ differently. They think it means . . . well I’m not quite sure what they think it means.”

    I believe truth to mean things as they really are, and of things as they really will be.

    If truth is defined as anything other than things as they really are then we need a new word that describes this fundamental and concrete concept.

  11. Gravatar of Catherine Catherine
    5. January 2013 at 11:49

    Hetzel says that the housing slowdown & the oil price spike produced a “moderate recession.”

    Then the Fed turned a “moderate recession” into a “major recession.”

    In my own mind, I think of Heztel as arguing that housing & oil produced a (moderate) recession, while the Fed produced a financial crisis. (I’m not sure whether Hetzel ever puts it that way.)

    In terms of the general public, distinguishing between “moderate recession” and “financial crisis” may be more effective than saying that the Fed caused the “Great Recession” — especially given all the attention Reinhart/Rogoff have had.

    In any event, using this formulation I’ve been able to persuade a couple of people to stop rejecting the ‘Fed hypothesis’ out of hand.

  12. Gravatar of Geoff Geoff
    5. January 2013 at 13:18

    “Most people don’t understand fiat money, or open market operations, or public debt.”

    This is what I keep saying to those I discuss this with, but too often I am told that the market is efficient enough to prevent misinformation from inflation.

    I always thought that the lack of knowledge in the general population is the very reason why monetary policy can even influence the economy away from where it would have gone in the absence of monetary policy.

    Shrug.

  13. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 13:34

    The debt ceiling was not written into the Constitition by the Framers but is a 20th century invention.

    “A statutory limit has restricted total federal debt since 1917 when Congress passed the Second Liberty Bond Act.”

    http://fpc.state.gov/documents/organization/105193.pdf

  14. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 13:34

    The debt ceiling was not written into the Constitition by the Framers but is a 20th century invention.

    “A statutory limit has restricted total federal debt since 1917 when Congress passed the Second Liberty Bond Act.”

    http://fpc.state.gov/documents/organization/105193.pdf

  15. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 13:35

    “RGDP is always PREFERABLE to inflation. And the more you repeat that part, infuse it into your arguments, the more rational you will sound.”

    Of course it is but there are some things less desirable than either.

  16. Gravatar of Alex Hamilton Alex Hamilton
    5. January 2013 at 13:46

    Scott, have you spent 5 seconds thinking about the Constitution?

    No?

    The explain to me why you think you have anything useful to say about Congressional control over the size if the US debt.

  17. Gravatar of Bill Woolsey Bill Woolsey
    5. January 2013 at 13:59

    I think that the debt ceiling is such a good idea it should be constitutional. Increasing it (or decreasing it) should require a constitutional amendment.

    I don’t think it requires default. It obviously does not require default.

    Refinancing the existing debt is consistent with the keeping a limit. As long is tax revenue is greater than interest, that can be paid as well.

    Congress has approriated money to pay interest, so there is tax revenue and authority to pay interest.

    The “problem” is that Congress has appropriated lots of other spending. It has also passed a law requiring that all the money it appropriates be spent.

    That isn’t what appropriation means. To appropriate is more like “authorize.” Anyway, I agree that a law that says that the Executive must spend all the money appropriated is inconsisent with a binding limit on total borrowing.

    In the U.S., the Constitution requires that interest be paid on debt. The Constitution is superior to any legislation. So, I think that President is fully justified in prioritizing interest payments on the national debt. Since it is appropriated, there really isn’t any problem.

    When the money for all the other expenditures runs out, then the President will have to quit spending.

    Why does this President threaten to default? Politics. He wants to authorization to borrow and keep on spending.

    As for the $1 trillion coin, it is a bad idea, however, it might motivate a change in the “monetary constitution,” which would be a good thing.

    I think Congress would have a good case in arguing that giving the Treasury authority to mint coins with a legal tender value less than the metalic value and then sell it at a premium over the metalic value is not at all the same thing as giving the Treasury authority to issue coins with the legal tender value greater than the metalic value and use it to avoid limits on spending.

  18. Gravatar of cucaracha cucaracha
    5. January 2013 at 14:17

    “I think that the debt ceiling is such a good idea it should be constitutional. Increasing it (or decreasing it) should require a constitutional amendment.”

    If something like that happened all the enemies of the US would be cheering for months (this is not my case, that’s why I am writing this right now).

  19. Gravatar of Doug M Doug M
    5. January 2013 at 16:18

    People complain of the shrill tone of the dialogue in Washington. I have to say, that while it is a bit ugly, it is better than the alternative.

    I want the opostion party to have a platform to make its case.
    I want conflict.
    The debt ceiling is a check that the minority party has on the party in power.
    It is not a monstrosity, but it may be a clumsy tool for what it does.

  20. Gravatar of Negation of Ideology Negation of Ideology
    5. January 2013 at 16:50

    I agree with Doug M on this one. Also Bill W, except on the part requiring Constitutional Amendment to raise the debt ceiling. It should require a 3/5 vote of each House and a Presidential signature.

    It sounds good to say that Congress passed the spending bills so the debt should automatically increase, but the problem is most spending is on long term entitlements that aren’t allocated by each Congress. Meaning that this Congress did not vote on 2/3 of spending in the budget. It requires a change in law to cut them. The debt ceiling vote is the only check on that.

    This talk of debt default is an obvious political ploy by the President. The Treasury Secretary can prioritize interest payments – the most that would happen would be a government shutdown of nonessential functions like we’ve had in the past. When Pat Toomey introduced the Full Faith and Credit Act to instruct the Treasury Secretary to prioritize debt payments, Obama opposed the bill simply because it would take away his ability to demagogue.

  21. Gravatar of ssumner ssumner
    5. January 2013 at 17:09

    K, Most Keynesians would laugh at you if you claimed tight money caused the recession. I’ve talked to many, you should see the looks in their eyes!

    Jim Glass, You are wrong on a number of points:

    1. Just because something is in the Constitution doesn’t tell us anything about how sensible it is. The guys that wrote the Constitution thought slavery was sensible.

    2. My comments have nothing to do with the Constitution in any case. It allows Congress to raise the debt limit to $500 quadrillion, and they should do so tomorrow. That’s sound public policy, it’s not a consitutional issue at all.

    3. The trillion dollar coin trick doesn’t violate the Constitution at all–it’s 100% legal.

    4. If the GOP forces a default, polls show the public will blame the GOP, as they should. The House will turn Democratic.

    5. If Obama avoided default by shutting down the government (military/Medicare/SS checks, etc) the public would be furious at the GOP, as they should be.

    6. The GOP needs to stop passing one big spending bill after another, and then refusing to raise taxes to pay for it. THAT’S the problem.

    Tim, Humans will never know “how things really are,” at best they’ll find useful knowledge for making predictions. We no more “know how things really are” than a couple ants walking across the roof of a nuclear power plant know what’s inside. Human’s are stupid.

    Catherine, I think it’s a close call as to whether we would have had a small recession w/o the NGDP growth slowdown. Maybe yes, maybe no.

    Bill, See my response to Jim Glass.

    Everyone, Obama should dare the GOP to force a default. I fear he is too timid. And keep in mind that I favor lower Federal spending (unlike the Republicans, who only pretend to favor lower Federal spending.)

  22. Gravatar of ssumner ssumner
    5. January 2013 at 17:22

    All you defenders of the GOP, read this and weep:

    http://marginalrevolution.com/marginalrevolution/2013/01/the-culture-that-is-republican.html

  23. Gravatar of Bill Woolsey Bill Woolsey
    5. January 2013 at 18:03

    Sumner:

    So, your view is that the GOP should raise taxes to fund the current level of government?

    I think that the President and Congress should cut government spending to be equal to the current level of revenues.

    If the House is willing to stick to the debt limit, then that will be done.

    Your talk of default is just scare tactics.

    Now, if you believe that the Republican party will lose seats in 2014 if deep cuts in government spending occur, you may be right.

    So?

    What Constitutional environment will help solve the problem of Congressman voting for programs they don’t want to fund?

    Telling them that they shouldn’t do it is probably not the most sensible approach.

  24. Gravatar of Jon Jon
    5. January 2013 at 18:38

    Scott,

    You’re showing a lack of imagination. The house could pass a measure which raises the debt ceiling incrementally month by month for six months, but only so much as would force spending cuts of some modest amount. It could attach additional riders that setup a rescission regime for that same period to manage this process without forcing congress to rule directly on policy within a few weeks. They would own the existence of cuts but the president can own the location of cuts within some guidelines.

    By keeping this round small, the dare is real–when the shit flies, point to the bill, say simply that the dept ceiling has been raised. Then if the public reacts poorly, truth is the game is up. But if they react optimistically, then six months later you do it again and get more aggressive.

  25. Gravatar of cassander cassander
    5. January 2013 at 19:00

    If the republicans were smart, they would happily raise the debt limit, about 300 billion or so worth. Then, in a few months, do it again. And again. And after a year or two of constant increases in the limit making obama look absurd, they’d have a much stronger hand. but they won’t do that, because they don’t actually want to cut spending.

  26. Gravatar of Jon Jon
    5. January 2013 at 19:32

    Scott writes: “All you defenders of the GOP, read this and weep:”

    Republicans campaigned on dismantling Obamacare, so this is symbolic. The article sticks to the facts so you’ve obviously filled in the context yourself. I think you may have gotten it wrong; it doesn’t help that the hill erred in a critical sentence: “The rules package signals that Republicans might not bring up Medicare cuts recommended by the IPAB — blocking part of a politically controversial law, and resisting Medicare spending cuts.” The last clause is wrong.

    The IPAC recommendations are self-executing. HHS has to carry them out unless congress overrides them with a supermajority vote. The 113th congress did not not write this procedure into their rules–which basically means they are under no obligation to hold a vote going on the record supporting or rejecting the IPAC recommendation.

    Now lets think about what that means. They can take up the IPAC recommendations, and pass bills in the usual way. If they pass the bill by majority vote, then it must be signed by the president and it is law decoupled from the original mechanism. The rules in question here require a supermajority of the house and senate to alter the IPAC recommendations. I.e., the same as would be required to sustain a veto.

    So what has really happened here? Nothing. The IPAC keeps operating, trimming costs, and there are no special procedures that force congress to go on record about those actions.

    As far as I can tell, this makes cuts more likely to happen, and makes sure that the president owns those cuts.

  27. Gravatar of mbk mbk
    5. January 2013 at 19:51

    Scott, your ideas on truth in science are too benign. The famous (apocryphal?) Max Planck quote often applies: “Truth never triumphs, its opponents just die out. Science advances one funeral at a time”. (And when I checked the wording on the quote an older Yglesias post jumped up quoting it too…)

    As for your propositions, as you know my opinion is that your no. 1) needs an additional variable for “tightness” to solve convincingly, since money is a component of NGDP. Without that, you can’t solve for “tight money” from “NGDP”.

    Completely off topic: just back from Western Australia. Gorgeous as ever, it is what I imagine California or the whole American West must have felt like before it became overcrowded and over-regulated. You can actually drive your car on beaches for miles, sit and drink on the beach, not see police for weeks, there are no queues for anything, there is space galore, there are still tons of true pioneer towns with pop 500 or so, with shifting fortunes due to mining or such. Signs that say “Your safety is our concern but your responsibility”. And then they really let you alone. And yet, it’s fully developed with everything up to today’s best standards. Differences with the US: no guns, no churches. And, brutally expensive. Felt like Sweden. With a ppp eye it seems the AUD is at least 30-40% overvalued. Even the wine isn’t cheap anymore and this is coming from Singapore with high alcohol taxes. The rest of the price differences are probably due to another thing: crushing, always evident scarcity of labor. Anything that is a service will make you bleed. Breakfast for 2 adults and one child: never below 50 AUD (= about 1:1 USD at today’s rates). Camp ground at caravan park, unpowered? $50. Taxi? $30 for 5 miles. etc etc. Even Europe is a lot cheaper in services. So there’s actually few dine-in places, relatively speaking (no one could afford that anyway) and the ones there are have pitiful opening hours (there are little alternatives anyway, ha!). It could stand as a prime exhibit for Tyler Cowen’s observation that a country’s labor cost and the quality and price of restaurant food predict each other. Compare Singapore with its cheap labor, you get excellent prepared food everywhere at cheap prices (and taxis too). In (Western) Australia where the population is small vs. the rest of its resources, you just don’t. This is one case where more immigration really would help everyone I’d guess. Anyhow, gorgeous country.

  28. Gravatar of K K
    5. January 2013 at 19:59

    Scott,

    “Most Keynesians would laugh at you if you claimed tight money caused the recession.”

    Sure, because it’s silly to blame monetary policy if you believe it’s as easy as it could possibly be. The New Keynesian perspective is that the natural rate collapsed to less than -2% as a result of the financial crisis. As a result, with inflation below 2%, the real rate is necessarily too high. If its part of your world view that monetary policy is insufficient whenever the natural rate drops significantly below zero, then it makes sense to say that the cause of the recession was the large drop in the natural rate. Maybe you aren’t talking to the right Keynesians or you aren’t really hearing what they are saying.

    Again, the actual difference between Keynesians and market monetarists is opinion on the effectiveness of QE at the ZLB. That’s about all.

  29. Gravatar of Benjamin Cole Benjamin Cole
    5. January 2013 at 21:23

    The platinum coin idea is an odd one, but it turns out the 50 states have the right to issue coins backed by silver of gold.

    But no Constitutional restriction on the amount of silver of gold per coin!

    So, a state like CA, which needs a boost that it is not getting from the Fed, could issue its own $1000 silver coins (with an ounce or two of silver) and use them to pay state bills.

    Employees and vendors would accept the coins, as they had no choice anyway, and as they know they can pay state taxes with the coins.

    This would boost CA’s money supply.

    There is no saying that the Fed money supply to perfect for every state, just like the ECB’s is not right for every nation in Europe.

    Well, state silver coins are up there with Treasury platinum coins…for now. As Sumner points out, what is acceptable today was blasphemy yesterday.

  30. Gravatar of Costard Costard
    5. January 2013 at 22:15

    “1. Just because something is in the Constitution doesn’t tell us anything about how sensible it is. The guys that wrote the Constitution thought slavery was sensible.”

    Most of them did not. What they thought was that they had a choice, between an imperfect union and a perfect mess.

    Fools rush in. You would have been as marginalized in 1787 as you are in 2012.

  31. Gravatar of Jim Glass Jim Glass
    6. January 2013 at 01:25

    @ W. Peden

    Except the debt ceiling doesn’t restrain the growth of government, including the growth of government debt.

    You mean bargaining over the spending budget is over? The debt ceiling is now meaningless as a political constraint and bargaining chip?

    Orzsag, Obama’s former budget head, disagrees with you.

    @Mike Sax

    The debt ceiling was not written into the Constitition by the Framers but is a 20th century invention. “A statutory limit has restricted total federal debt since 1917 when Congress passed the Second Liberty Bond Act.”

    If this is directed at me, re-read what I wrote.

  32. Gravatar of Jim Glass Jim Glass
    6. January 2013 at 01:52

    Jim Glass, You are wrong on a number of points:

    OK, let’s count ‘em up! :-)

    1. Just because something is in the Constitution doesn’t tell us anything about how sensible it is.

    How am I wrong about that? Every lawyer knows that, it’s the first day of first-year Con Law. But something being in the Constitution does tell you the law you have to follow in the USA.

    As Justice Holmes famously noted: the Constitution is *not* about right and wrong, if something is stupid and bad but constitutional Congress can do it, the courts will uphold it, if it is smart and good but unconstitutional Congress **can’t** do it, the courts will strike it down. That’s not very difficult.

    Remember, to get rid of slavery they actually had to change the Constitution. (The Emancipation Proclamation didn’t apply to the 25% of all slaves who were in the non-rebel areas because Lincoln *couldn’t* free them there.)

    You aren’t going to be able to change the Constitution, so if you want to eliminate the debt limit as we know it you are going to have to come up with an alternative that satisfies the constitutional requirement — such as the one used before WWI brought in the current arrangement.

    That’s certainly possible, but you have to *do* it. Anyone who doesn’t recognize this and propose such an alternative isn’t being serious. Which so far is just about everyone I’ve seen.

    And speaking of “sensible” — my word — people endorsing *trillion dollar coins* are mocking the Constitution’s provision that Congress must authorize government debt issuance as being “insensible”?? What bizzaro world have we entered?

    2. My comments have nothing to do with the Constitution in any case. It allows Congress to raise the debt limit to $500 quadrillion

    Of course Congress could authorize a debt limit of $500 quadrillion tomorrow, if it so chose. No problem.

    It is issuing debt without Congressional authorization that is unconstitutional.

    3. The trillion dollar coin trick doesn’t violate the Constitution at all–it’s 100% legal.

    And where does “Congress passes an act, thus *how I read it* is both legal and Constitutional” come from?

    How do you know? Are you kidding me?

    You’ve spent years here pointing out repeatedly and at length how very smart people who are true experts in their own fields are prone to make very bad errors when glibly venturing outside them. Like when lawyers, businesspeople, pundits, politicians and even top non-monetary economists opine about monetary economics (and how all that money supply increase and low interest rates *must* cause inflation!). But knowing that doesn’t seem to restrain you from doing the same thing the other way. Do monetary economists really know more about law than lawyers know about monetary economics?

    The plain intent of Congress in authorizing platinum coins was to make a de minimus amount of such money available to collectors. “Trillion dollar coins” clearly — damned clearly! — violate that intent. Government actions are struck down every day for violating the clear intent of the law they purportedly are based on. (No constitutional violation necessary.) How does this differ? … There also is an explicit federal statutory prohibition against monetization of the debt, and while it doesn’t specifically anticipate and consider “trillion dollar coins” (how could it?) the *intent of that law* is plain and obvious. How do you get around that? … So you are going to go before a judge to argue: “We are HUGELY, staggeringly, violating the plain intent of Congress in Law One to defeat the plain intent of Congress in Law Two”. And you think it is a *no-brainer* that you obviously are going to win?

    If you ever get in a legal dispute don’t appear pro se, pay a lawyer, the fee to my brother will be worth it to you, shyster though he may be.

    And that’s not even considering the fact that both plain violations of Congressional intent are being combined *admittedly* for the explicit purpose of gaining a runaround to a Constitutional requirement.

    Since when can’t an act of Congress that is *admittedly* intended to violate a constitutional provision be held unconstitutional? What Amendment repealed Marbury v Madison? So that you can *know* there is no constitutional challenge possible???

    4. If the GOP forces a default, polls show the public will blame the GOP, as they should. The House will turn Democratic

    5. If Obama avoided default by shutting down the government (military/Medicare/SS checks, etc) the public would be furious at the GOP, as they should be.

    Yes. So what? I never said otherwise. And I’m not a Republican so I don’t particularly care.

    So how am I wrong about those points?

    BTW, what would the Fed issuing a few trillion dollars in currency do to the credit standing of the USA, and to the dollar in the financial markets? How would issuing trillion dollar coins to pay for the govt be more beneficial? If we are worried about bad things happening.

    Hey — how about just issuing several trillion dollars of new bonds into the Medicare and Social Security Trust Funds, and/or raising the interest rate paid on the bonds in those trust funds — it’s set by legislation — by enough to fund entitlements forever! Heck even by enough to let the rest of the govt keep borrowing from the trust funds to pay for all its bills forever. After that, no more debt ceiling problems ever!

    And no constitutional problems there at all! We’ve *already done* those things, happy legal precedents are set!

    Let’s do things the easy, safe way. (Back in usenet days these were joke proposals in sci.econ, but I’ve seen them made *seriously* more recently — though the “trillion dollar coins” loopiness seems to have usurped their thunder.)

    . The GOP needs to stop passing one big spending bill after another, and then refusing to raise taxes to pay for it. THAT’S the problem.

    They both have to do that. Obamacare wasn’t a GOP bill. And as I pointed out in my comment under the prior post, by making the Bush tax cuts permanent for 98% of the population — and setting the resulting new much-reduced future revenue baseline — the Democrats have revealed to the world they have no interest whatsoever in raising taxes on their constituents either.

    The real problem isn’t even that they both won’t raise taxes, the problem is the spending, period. Because as Friedman pointed out, spending sets taxes, spending = taxes, in the end there is no other source of spending than taxes (as taxes pay for debt service). So taxes will go up eventually. Not raising them now just means they will go up by more later.

    And the cost of the marginal tax rates then, plus of the loopholes and corruption that will be driven by deadweight cost … whew! That’ll be a cost!

    I’d think small government types would welcome *any* political tool that could be used to fight that, avert that to any small degree possible, constrain those **spending increases**.

    The debt ceiling is a small, third-rate such political tool with the subtlety of a claw hammer — but what else have you got? What is the logic of wanting to replace something that is “not good enough” with nothing at all, which is bound to be worse?

    I understand how the Krugmans and Dean Bakers and “government can’t possibly spend enough” types would hate the debt ceiling — but why libertarians and enemies of the distortions of rising marginal tax rates would loathe it, instead of wishing it were stronger so they could make more of it, is beyond my understanding.

  33. Gravatar of Vivian Darkbloom Vivian Darkbloom
    6. January 2013 at 02:31

    “3. The trillion dollar coin trick doesn’t violate the Constitution at all–it’s 100% legal.”

    I’m torn between taking Scott literally (something Scott often admonishes his readers to do), and supplying a more generous interpretation, a la Mr. Kling’s plea to be kind. If the former, it doesn’t make a lot of sense. I struggle to figure out what the consequences would be if “the trillion dollar coin trick” would only be 75 percent legal. If I’m more generous, I might combine “is” with “100 percent” and “at all” and come to the conclusion that, in Scott’s expert view, the “trillion dollar coin trick” is certain to pass Constitutional muster. This is, in the nomenclature of legal opinions, known as a “will” opinion. Those are mighty tough to come by in the real world.

    I never cease to be impressed by the modern-day economic blogger. They truly are Renaissance Men (thankfully, women don’t seem to qualify). They seem to know everything, not only in largely unknowable field of economics (whether or not that field it is their “specialty”) but also about politics, law, the environment, tax policy, the budget, where to get a good cheap Mongolian meal at a strip mall, what the best movies are, the housing market in China or North Korea, etc.) Not only that, quite a bit of the time they know all this with 100 percent certainty, or at least much better than the rest of us.

    When I read the blogs of our Economic Renaissance Men, such as the Money Illusion, Marginal Revolution, the Conscience of a Liberal, the Wonk Blog, etc., I often do weep, but not necessarily for the reason Scott thinks.

    Having studied Constitutional Law (I’m sure before Scott did), and having taught a few courses on the subject (on the side and albeit quite a number of years ago), I’d have to say I’m not so sure that the “trillion dollar coin trick” is “100 percent legal”. But, it’s quite possible that I’m just not up on the latest.
    I seem to recall that when interpreting the Constitution, those 11 justices often look to the intent of the drafters and the signers as well as more than 200 years of subsequent case law precedent. One of the first things I then ask myself is “what would those folks have thought of the “trillion dollar coin trick””? What are the chances the Supreme Court might conclude that this “trick” does not comport with their intent? I guess the modern tendency is for the Constitution to be viewed as “living document” which is to say that it means anything convenient to the present political circumstances, but in this case, I love my farm to much too much to bet on that.

    During most of my career, I spent my time and effort interpreting statutes and treaties dealing with the international aspects of the corporate income tax. While not involving precisely the same criteria, statutory interpretation involves many of the same issues as interpreting the Constitution. Quite often, folks would come to me and my colleagues with “tricks” that they had cooked up that they hoped would “avoid” tax. They often made the same mistake that Scott seems to make here: Those words can and should be taken literally, and if our transaction literally fits the language of the Code, we can do it. Whaddya say? I say, first, let’s recall those immortal words of Alexander Pope, “drink deep or taste not the Pierian Spring; there shallow draughts intoxicate the brain…”

    One of the less pleasant and tedious aspects of that job was to say “no” to these “tricks”. One had to explain that, well, the literal language of the Code notwithstanding, we’ve got other things to consider, such as the step transaction doctrine, form over substance doctrine, etc, or even that most famous of all “the smell test”.

    Not so many years ago, Congress and the Justice Department were outraged about the amount of aggressive tax planning that was costing the Treasury a lot of revenue. Law firms and big accounting firms were using “tricks” and other “aggressive tactics” to avoid (and in some cases “evade”) tax. Congressional hearings were held. Representatives and Senators registered outrage. Lawyers and other advisors were criminally prosecuted. Some were convicted and sent to jail. I think a few of them are still there.

    In essence, what some of those advisors were guilty of was having taken the Code too literally. They had given clients opinions (not the type of “will” opinion that Scott is handing out, mind you, but relatively uncertain “more likely than not” opinions”). Those that went to jail were guilty of failing to consider the “business purpose doctrine”, among other things. That is, while the transactions they sanctioned were literally in compliance with the language of the Code, their transaction failed to have a legitimate “business purpose” other than that of avoiding tax.

    I can imagine that the job of those prosecutors would have been much easier had those they were prosecuting consciously referred to the tax strategy they employed as the “trillion dollar tax trick”. It’s a good thing that economists and, in particular, economic bloggers, are not held to the same standard of care.

    At the end of the day, it’s not entirely clear to me that the Supreme Court would uphold or strike down “the trillion dollar coin trick”. But, then again, I’m neither a blogger nor an economist.

  34. Gravatar of Vivian Darkbloom Vivian Darkbloom
    6. January 2013 at 02:35

    In re-reading this I see that the number 11 appears where it should be 9. As in, a stitch in time, saves 9, not 11.

  35. Gravatar of Ben Southwood Ben Southwood
    6. January 2013 at 03:50

    Scott,

    By true I intend “is in fact the case”. For example, if I say that the claim “all bachelors are unmarried men” is true, then I mean that it is in fact the case that all bachelors are both unmarried and men. Obviously I’m making it easy for myself by choosing an analytical claim which I can easily verify to be true by checking the meanings of the words “bachelor”, “unmarried” and “men”, and the meaning of the syntax/grammar I’ve arranged those words in.

    But it’s really no different when I switch the claim to an empirical claim. Let’s say I say the claim “Scott Sumner is at heart market monetarist” is true. It’s an empirical claim, but also one I can never have any conclusive evidence on, both in a simple sense (e.g. I don’t trust your claim that you are, in fact, a market monetarist at heart) or in a sceptical sense (e.g. my senses might be deceiving me and you might not have actually said what I think you said, to wit, that you are at heart a market monetarist). But this doesn’t mean that my use of true (that something is in fact the case) is less meaningful.

    You certainly can understand what I mean when I claim “SS is at heart an MM” to be true. Otherwise, 1., 2., and 3. in your p.s. would all be entirely meaningless (consider: “something is true if it is generally believed to be true” – this definition is entirely recursive; if we didn’t know what the second true meant, then we couldn’t know what sort of belief someone would have to define the first true) These points are trading on another definition of true (most likely the one I’ve used, because that’s the one everyone uses). But of course if we adopt this definition then we must drop the other definitions that are meaningless without it.

    I apologise if my exposition is unclear, but I think it’s a reasonably straightforward way of explaining what most people (and, I believe, you) mean by “true”.

  36. Gravatar of Benjamin Cole Benjamin Cole
    6. January 2013 at 06:04

    Ms Darkbloom–

    As a Constitutional scholar, then does it pass your muster that the 50 states could issue coins, as long as such coins were made from silver of gold?

    And could such coins have denominations such as $1000, regardless of the silver of gold content?

    My reading of the Constitution says yes.

  37. Gravatar of Saturos Saturos
    6. January 2013 at 06:50

    Technical quibble: moral relativism isn’t the opposite of moral realism, just as idealism isn’t the opposite of metaphysical realism (that would be anti-realism).

    With your point number 2 on convincing economists of your point of view, you’re forgetting that they could always react like Noah Smith. Accept that the Fed can always hyperinflate if it wants to, but deny that it can perfectly stabilize expected NGDP 12 months out within ten basis points of the target, or whatever.

    Yes, the flaw with coins is that they’re too pretty.

    (And btw, the correspondence theory of truth is the best theory of truth. Because it is the most useful, you might say.)

  38. Gravatar of Saturos Saturos
    6. January 2013 at 07:01

    Ouch, that was, as we young people say, an “epic burn” from Vivian.

    Ben Southwood, “Snow is white” is true if and only if snow is white, eh?

  39. Gravatar of Michael Michael
    6. January 2013 at 07:25

    Doug M says:

    “I want the opostion party to have a platform to make its case.
    I want conflict.
    The debt ceiling is a check that the minority party has on the party in power.
    It is not a monstrosity, but it may be a clumsy tool for what it does.”

    The part of this that I find monstrous is that probably 90% of Congress, including Republicans, want the debt ceiling raised. Politics being what it is, there are those who absolutely want the debt ceiling raised but who also refuse to vote for it, because they also want to preserve their ability to campaign against raising the debt ceiling (even though they want it raised) and avoid getting primaried from the right.

  40. Gravatar of Ben Southwood Ben Southwood
    6. January 2013 at 07:30

    Saturos,

    I don’t see my post as making any controversial epistemological claims.

    I’m not talking about what makes some proposition true – I’m talking about what the word “true” means. It seems to me that everyone uses it as if it means “is in fact the case” – including Scott, given his allegedly meaningful examples in the p.s.

    e.g. True = most people think is true, doesn’t make sense, but it’s probably trading on true = most people think is in fact the case, in which case it’s assuming the definition I’m going with.

  41. Gravatar of Saturos Saturos
    6. January 2013 at 07:39

    Ben, I agree that “True = most people think is true” is an absurdity, as are Scott’s other proposed “definitions”. But I think you’ll find that your “definition” hasn’t made matters all that much clearer. When Wittgenstein said, “The world is all that is the case”, he was in fact assuming quite a bit of background knowledge. That’s why we have philosophy courses.

  42. Gravatar of W. Peden W. Peden
    6. January 2013 at 07:43

    Saturos,

    “That’s why we have philosophy courses.”

    And they’re how I get a job, and relax enjoying the interesting things that economists sometimes have to say, including about philosophy.

  43. Gravatar of W. Peden W. Peden
    6. January 2013 at 07:44

    The circle of life!

  44. Gravatar of Saturos Saturos
    6. January 2013 at 07:46

    “Ouch, that was, as we young people say, an “epic burn” from Vivian.”

    But not as badly as they’re going to rip into Bryan Caplan for this post: http://econlog.econlib.org/archives/2013/01/women_liberty_m.html

    (I believe Brad DeLong has already dubbed him “the stupidest man alive” for contending that American women were freer in the 19th century.)

    W. Peden, wow, where do you teach? Any free stuff of yours I can read?

  45. Gravatar of ssumner ssumner
    6. January 2013 at 07:49

    Bill, You asked;

    “So, your view is that the GOP should raise taxes to fund the current level of government?”

    No, I favor cuts in spending. But the GOP doesn’t, as they want to increase big programs like the military and Medicare. Given their spending plans, they need to increase taxes. But again, my preference is to cut spending. They can use the sequestor to do that, not the debt ceiling.

    Jon, See my answer to Bill, the GOP doesn’t want to cut spending. They control the House, if they want to cut spending then cut spending.

    It seems I was wrong about the IPAC (as was Tyler.) Can anyone confirm?

    K, You said;

    “Sure, because it’s silly to blame monetary policy if you believe it’s as easy as it could possibly be.”

    So if the BOJ pegged the yen at 200/$, you would not consider that an easier monetary policy?

    You said;

    “Again, the actual difference between Keynesians and market monetarists is opinion on the effectiveness of QE at the ZLB.”

    Not really, Krugman and I both agree that temporary QE is not effective at the zero bound, and we agree that permanent QE is effective.

    mbk, I agree with Planck, and money is not a component of NGDP.

    I totally agree on WA. I was there in 1991 when it was cheap (the A$ was 65 cents.) It’s one of the freest places on earth, maybe the freest. 100 mile beaches with not a person in sight–utopia. I drove from Darwin to Perth by myself, slept in the back of a rented van.

    Ben, I didn’t know that–do you have a reliable source you can link to?

    Costard, Obviously I meant the Constitution clearly contained bad ideas, it’s not infallable. The motives don’t really matter.

    Jim, See my answers above. The GOP needs to spend less and raise the debt ceiling close to infinity. If it wants to reduce spending, DO SO!

    Doesn’t the law say “any amount the President chooses?” If so the strict constructionists on the Court will defend Obama, as will the liberals (obviously).

    The GOP is a bunch of cowards, I have no intention of making their lives easier by supporting the debt ceiling. They should take the tough votes and then retire.

    Vivian, OK, but then let it wind through the courts for years, even that would be better than a debt ceiling right now. BTW, if you plan to ridicule me, at least use the blog posts; my comments section remarks obviously contain some hyperbole. I stand by my comments on the coin in the post itself.

    Ben, As I’m sure you know, the world’s greatest epistemologists have never agreed on a procedure for verifying the truth of a statement. So I can say:

    “I regard X as true.”

    “I regard X as true, and it really is true.”

    Most people think the second phrase adds something. But it’s not clear what it adds. How is it different if I regard something as true, and if I say “it actually is true?” You seem to see a difference, I don’t.

    Alternatively, some people seem to confuse “true,” a word that applies to human statements, and “reality,” which is an ontological concept.

    Our minds contain a model of the world. I view true statements as statements which contain useful information about that model, nothing more. Some of the things we regard as true will later not be regarded as true, but we often don’t know which ones.

    Saturos, I agree that moral realism and moral relativism are not opposites. I don’t accept either view, and have tried to stake out my own position in other posts.

    I suppose you are right about Noah. I’d add that most economists favored fiscal stimulus, which cannot stabilize expected NGDP anywhere nearly as closely as a future targeting regime. And that we wouldn’t need to get anywhere near 10 basis points to avoid the Great Recession. Three hundred basis point would be good enough.

    I don’t understand the usefulness of the correspondence theory of truth, at least as an abstract philosophcal position. Perhaps as a working hypothesis.

    Is quantum mechanics any less useful if we accept the many worlds view, as compared with the standard view? Maybe, I know very little about physics, despite acting like I am what Vivian calls a “renaissance man.”

    I think that I have a useful model of “reality” in my mind. I don’t believe for a moment that I have an accurate model of reality in my mind. I’d guess that reality is probably far stranger than I (or ants or worms or rabbits) could imagine.

    Humans have this laughably naive view that no animal was able to understand the nature of reality until we came along. The pinnacle of evolution? Or just the beginning?

  46. Gravatar of ssumner ssumner
    6. January 2013 at 07:51

    BTW, Saturos is right, Vivian did demolish me in that comment.

  47. Gravatar of ssumner ssumner
    6. January 2013 at 07:59

    Saturos, There are certain ideas in philosophy that require a kind of mental leap. Like going from seeing the vase to seeing the profile. These include:

    1. No free will.
    2. No such thing as personal identity.
    3. Truth is what my friends let me get away with.

    No one should rely on my pathetic explanations, they should read the great philosophers.

  48. Gravatar of Saturos Saturos
    6. January 2013 at 08:23

    Scott, yep, because those are all absolutely settled positions which all philosophers agree on…

    The “interpretations” of quantum mechanics are not actually part of the core physics itself. I think they are all irrelevant, and should not in any case be used to judge theories of truth. (But then I’m a radical instrumentalist, so…)

    I like your last two paragraphs in the super long comment, though.

  49. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. January 2013 at 08:56

    ‘In re-reading this I see that the number 11 appears where it should be 9. As in, a stitch in time, saves 9, not 11.’

    Off topic (well, not all that far off), but I just read that Alger Hiss admitted that, at the time, he was adamantly in favor of FDR’s court packing scheme. Since Hiss never had an idea that wasn’t also Stalin’s first, and it makes perfect sense for a totalitarian to oppose an independent judiciary (as well as any other check or balance to an Executive’s power), that seems even more reason not throw out the Constitutional Baby with the Bathwater.

  50. Gravatar of Ben Southwood Ben Southwood
    6. January 2013 at 09:26

    Scott,

    I’m not adding much, and we might be speaking at cross purposes, but I think you probably get what I’m saying, because you’re using the word “true” as if you agree with my definition of it. You’re not using it as if you think it means “is a useful proposition to hold”.

  51. Gravatar of Philo Philo
    6. January 2013 at 11:14

    Terms for the most basic concepts, such as truth, cannot usefully be defined. By the way, your three proposed definitions of ‘true’ (“It’s generally regarded as true,” ”I predict it will be regarded as true in the future,” and ”It is regarded as true by God”) are all obviously unsatisfactory: materially, none of them has the right extension, as can be shown by easily produced counterexamples; formally, each of them uses the term ‘true’, and so is circular.

  52. Gravatar of Jon Jon
    6. January 2013 at 11:29

    Saturos says: “The “interpretations” of quantum mechanics are not actually part of the core physics itself. I think they are all irrelevant, and should not in any case be used to judge theories of truth. (But then I’m a radical instrumentalist, so…)”

    Though it is still true that some interpretations are obviously wrong–have plain implication which contradict observation or contradict the mathematical model…

    Let me take the boarder view though that the equations aren’t the core of physics. They are the model just as the narrative is a model.

    The core of physics is simply that the world is based in rules and the same rules operate in all scales and in all places. Whenever you find a violation of that principle, you haven’t found the one rule.

    So in short, the core of physics is that reductionism is true.

  53. Gravatar of ssumner ssumner
    6. January 2013 at 11:43

    Saturos, No, because those are the people who will provide the most interesting arguments. Philosophy is a game, isn’t it? A way to amuse oneself during this bleak existence on planet Earth.

    Patrick, Yup the Court packing was a disagrace, indeed FDR’s record was pretty weak in the area of liberty vs. authoritarianism. And I agree, let’s not throw out the Constitution. I even believe in the 2nd amendment.

    Ben, I often use terms like “true” “free will” “personal identity” and “bubble” they way that average people use them. That doesn’t mean that I believe these terms actually stand up to close analysis.

    Philo, You might be right. I think where the rubber meets the road is the question of whether a field like epistemology is useful, or whether we should just get on with the effort to persuade our peers (without philosophers trying to referee.)

    Saturos and Jon, If it does matter which interpretation of QM is true, then humans don’t really understand “reality,” at least as most people would interpret that term. Instead we have useful models to predict and control. But isn’t that my view of truth? Or have I missed your point?

  54. Gravatar of Bill Woolsey Bill Woolsey
    6. January 2013 at 12:31

    Scott:

    Why are you so against a debt limit as a way of constraining government borrowing?

    The default business is false.

    It is along the lines of politicians instisting on tax increases and threatening to cut what voters want most. If you don’t raise taxes, I am going to close the fire station. (And still pay all of the assistants at Town Hall.)

    I agree that opposition to defense and medicare cuts among the Republicans is unfortunate.

    Just like I think opposition to these things among Democrats is unfortunate.

    But opposition to raising the debt limit is a good thing.

  55. Gravatar of W. Peden W. Peden
    6. January 2013 at 13:29

    Saturos,

    I could send you a copy of my PhD, but only well after I’ve started it! I’m on a gap year right now, between my masters and PhD.

    I teach the history of philosophy (David Hume last semester) and logic (starting February).

  56. Gravatar of Mike Sax Mike Sax
    6. January 2013 at 17:49

    “If the GOP forces a default, polls show the public will blame the GOP, as they should. The House will turn Democratic.”

    Thats a good point Scott. The GOP doesn’t have the leverage they think they have on the debt ceiling.

    It’s also true as you suggested before that the GOP would have gotten a lot more had they been willing to compromomise on ay point on taxes back in 2011.

    When Boehner proposes a $1,000,000 floor on higher taxes, Democrats like me were scornful-who did he think he was kidding?! We wondered.

    However, back in 2011 Nancy Pelosi and Schumer were calling for the same floor and we would have thought that was a good deal back then.

    Even on this latest deal, the GOP would have gotten a better deal had they passed Obama’s “grand bargain” to Boehner-chained CPI. By refusing to bend, Boehner hand no part to play in the final deal that was done in the Senate and rammed through the House

  57. Gravatar of Mike Sax Mike Sax
    6. January 2013 at 17:52

    My way or the highway is not the brilliant negotiating stance the GOP thinks it is. Even in the 90s it burned them in the government shutdown of 1995

  58. Gravatar of K K
    6. January 2013 at 20:40

    “So if the BOJ pegged the yen at 200/$, you would not consider that an easier monetary policy?”

    It’s not creating demand, just stealing it from elsewhere. It’s “easier” domestically only to the extent that it’s tighter abroad. So no, I don’t think it’s particularly interesting if the cb isn’t even capable of creating net demand.

    “Not really, Krugman and I both agree that temporary QE is not effective at the zero bound, and we agree that permanent QE is effective.”

    Krugman has said that QE is at worst harmless and worth giving a shot. But if he really agreed with you, he wouldn’t advocate fiscal policy. And the NK model, and particularly Eggertsson Krugman 2010 is unequivocal in its support for fiscal policy. So *no* Keynesians do not believe you can manage demand with QE, and have excellent theoretical reasons not to believe it.

    Again, you should read NK papers rather than just talking to Keynesians about what they say. There is simply no doubt that the NK model says that policy is too tight in the liquidity trap. This is totally obvious and it’s hard to comprehend that we could be debating it.

  59. Gravatar of Saturos Saturos
    6. January 2013 at 23:41

    Will Wilkinson Comments On Platinum Coin Option, Calls It Fascism: http://www.economist.com/blogs/democracyinamerica/2013/01/fiscal-reckoning

    Also notice how he doesn’t even comment on base-broadening, instead making what sounds like a call to raise the inflation target. I love it when he pretends to be an expert on hard economic matters, whilst taking potshots at the “pundit id”. Maybe Vivian Darkbloom should have a go at him, too.

    p.s. Darkbloom is still a tres awesome surname, I stand by my opinion.

  60. Gravatar of Steve Roth Steve Roth
    7. January 2013 at 06:46

    Scott: Does this make sense to you?

    Treasury:

    “We have a statutory obligation to pay all amounts that have been authorized by Congress — both expenditure and debt obligations. Since the borrowing limit has been reached and Congress won’t let us sell bonds to make the payments they’ve authorized, we are now issuing physical currency, in the form of platinum coins, to meet those obligations. We are required to do this by statute.”

    Fed:

    “Don’t worry, we’ll adjust bond purchases/sales (OMO/QE) as needed to control inflation. We got this.”

    Treasury doesn’t need to issue a trillion-dollar coin. The optics are all wrong on that.

    They can start issuing million-dollar coins as needed to meet their (our) obligations, at the same rate that they’ve been issuing bonds to meet obligations.

    They deposit the coins at their bank (the Fed), and spend as usual using checks and bank transfers.

    The coins would be effectively the same as perpetual, zero-interest bonds.

    If the Fed runs out of bonds to sell and inflation is still a problem, they could go to negative interest on reserves (IOR) and sell the coins they’ve collected.

    http://www.angrybearblog.com/2013/01/platinum-currency-whats-feds-end-game.html

  61. Gravatar of ssumner ssumner
    7. January 2013 at 06:46

    Bill. It dodges the real problem which is the mismatch between spending and taxes. That’s the problem Congress must solve. Holding a gun to you own head and threatening to blow it off is the action of a banana republic, not a great country. Congress created this problem–threatening a default is not the way to solve it. I’d expect that of someone like Chavez.

    K, You said;

    “It’s not creating demand, just stealing it from elsewhere. It’s “easier” domestically only to the extent that it’s tighter abroad. So no, I don’t think it’s particularly interesting if the cb isn’t even capable of creating net demand.”

    This is a common mistake, and overlooks that the income effect is often more powerful than the substitution effect.

    In 1933 after FDR devalued our trade deficit rose as the fast growing economy sucked in imports.

    Your comment on Krugman doesn’t respond to what I said, and I’ve read many NK papers.

  62. Gravatar of ssumner ssumner
    7. January 2013 at 06:50

    Steve, If I read that correctly, at the end of the day the spending gets financed by ERs, which pay 1/4 point. Is that right? In other words after the Treasury deposits the money at the Fed, the base rises, mostly in the form of ERs.

    Saturos, Will’s a good writer.

  63. Gravatar of Steve Roth Steve Roth
    7. January 2013 at 07:25

    @Scott: Right. Treasury deposits coins, Fed issues reserves into Treasury’s account. When treasury spends, those reserves are transferred to recipients’ banks’ Fed accounts. I know how much you like nickels, so I’m wondering how you’d feel about million-dollar platinum coins playing a similar role. Safe assets?

    The question is what happens if inflation results, and the Fed runs out of bonds to sell. They can’t sell the coins with positive IOR in place (why would anyone buy them?), so would they have to go to negative IOR? Would this be a good/bad/okay thing?

  64. Gravatar of K K
    7. January 2013 at 08:25

    Scott,

    “This is a common mistake, and overlooks that the income effect is often more powerful than the substitution effect.”

    Maybe. But with most of the developed world already liquidity trapped and few options being available vs the Renminbi this strikes me as a red herring. Who are North America, Europe and Japan collectively going to devaluate against since buying each others debt is no more useful than each of us buying our own? Reals, Rubles, Rands and Rupees? Francs?? It doesn’t add up to much, and surplus countries like the BRICs aren’t just going to take it and they hold the upper hand in competitive devaluation for the simple reason of the vast outstanding quantity of freely traded first world debt and the relatively small size of the (non-China) BRIC economies.

    Anyways, I’ll certainly grant you that there are circumstances under which competitive devaluation could pull part of the globe out of a liquidity trap given sufficient demand in the rest of the world (and that it’s not necessarily a zero-sum game). But it wont work in all circumstances (and may cause trade wars even when it could work) so it doesn’t address the omnipotence of monetary policy issue. For that you have to make the closed economy case.

    “I’ve read many NK papers”

    I don’t actually doubt that. I was just responding to you arguing what Keynesian economics says by appeal to your discussions with Keynesians. But given that you have read them, you will know that the problem occurs at the ZLB because the policy rate is above the nominal natural rate. Ie. Monetary policy is too tight! This is not even remotely new. It’s trivial old-fashioned IS/LM. It’s also right there in the General Theory! It’s not novel and it’s not interesting, which is why Keynesians won’t point to it as an explanation. If a man drowns it’s not interesting to note on the police report that the cause of death was the lack of air under the surface of the water. No shit Sherlock! We want to know *how* the man ended up under the water. That’s why we talk about the financial crisis. Market Monetarists, on the other hand, claim that there is air under the water, so for you it’s interesting to point out that the man failed to breathe it. Not for Keynesians.

    On Krugman: “we agree that permanent QE is effective.“

    In the NK model permanent QE is *exactly* equivalent to a particular contingent path of the short rate so Krugman believes in it probably exactly to the same extent that he believes in forward rate guidance. Except that in practice forward guidance is *much* better stated in explicit terms of the contingent path of the short rate. So yes, I sure Krugman believes that credible permanent QE could work. The fact that it is actually ridiculous is clear from the fact that the base has expanded by multiple factors whereas a credible commitment would only have to be by at most a few tens of percent. So the credibility must be close to zero. Also, even if it could be credible such a small committed base expansion would be dwarfed by other random factors affecting the money demand so even under a credible circumstance it would be indecipherable. You should try to formulate clearly articulated contingent path of QE that the CB could follow. I will bet you cant.

    The only thing that actually matters is that for all intents and purposes *all excess reserves* must be removed from the system in order for the interbank rate (which is extremely important for the economy) to exit the ZLB. Between now and then, the quantity of excess reserves will have some irrelevant path. Once inflation or NGDP or whatever starts to take off, it will be immediately obvious that excess reserves have to go straight to zero completely independently of wherever they were in previous moment. This is why you will never find smart Keynesians like Woodford endorsing QE.

  65. Gravatar of jj jj
    7. January 2013 at 13:28

    “the debt ceiling itself is such a logical monstrosity that any zany gimmick like the trillion dollar coin is fair game.”

    Please don’t write this off as a lunatic fringe comment:
    There is nothing illogical in the debt ceiling itself.

    Throughout most of human history, the size of the nation’s treasury has probably limited the budget more often than the other way around. The debt ceiling itself grew out of this mindset, that only congress could authorize a debt issue and it wouldn’t happen automatically due to poor budgeting.

    The illogical situation we find ourselves in is caused by the contradiction inherent in Congress passing both a debt ceiling, and budgets which are sure to breech the debt ceiling. Today we see that the debt ceiling has been raised as a matter of course so many times, that not to do so is crazy. In the early years of the republic, it would have been considered even crazier to pass a budget when no bonds had been authorized to fund it.

  66. Gravatar of RebelEconomist RebelEconomist
    8. January 2013 at 02:21

    I do agree with you about the trillion dollar coin trick, Scott. The Republicans are using the letter of the law to cause trouble, so the government should not hold back from using the letter of the law to thwart them. I think that it is important to manage the process properly though. The Fed should issue exactly the same bonds as the Treasury would have issued (perhaps with a promise to convert them later if required), so that there is no question of money creation. I think that people could accept the idea of the Fed borrowing to lend to the Treasury. The practical difficulty I can see might be that some treasury investors do not have a formal credit line for the Fed, so it is important to announce the plan well in advance of using it to allow them time to adjust.

  67. Gravatar of Vivian Darkbloom Vivian Darkbloom
    8. January 2013 at 04:32

    Saturos,

    Sorry for the tardy response to your comment(s); however, certain domestic disturbances delayed me (I’m reminded here of the skit about Beethoven trying to compose at the piano while someone was vacuuming around his feet—not that I’m comparing myself to Beethoven; however, I assume the general scene is familiar).

    There is no point in objecting to WW’s characterization of willingness to pursue this idea as “fascism” because I would agree with that characterization. Every thug in history, from Stalin to Hitler to Mugabe to Chavez and their enablers, witting and unwitting, who have abused whatever legal and constitutional impediments that stood in their way to consolidate their own power for what they argued was “the common good”.

    WW’s characterization of this as a “loophole” is also telling: On the one hand, the description (much like “the trillion dollar coin trick”) is an admission that almost any sentient being would make: Congress did not intend to delegate its Constitutional power and responsibility over the debt to Treasury. As far as legislative intent is concerned (before one even gets to the Constitutional issue), the legislative history indicates (thanks for the link):

    “The Committee has included two provisions (Sec 523 and Sec. 524) which allow the Secretary of the Treasury to expand the sale of gold and platinum coins for the Numismatic Coin Program. …Sec. 524 will allow the U.S. Mint to enter into the platinum coin market…. Receipts from the sales of these additional programs is estimated at $21,000,000 in 1997 and $88,900,000 over five years and will be deposited into the General Fund of the Treasury for deficit reduction”.

    A few points about the legislative intent of this provision as reflected in the above:

    1. The purpose of allowing Treasury to sell platinum coins was to expand the *Numismatic Coin Program”;
    2. It was foreseen that the numismatic coins would be *sold* and that the proceeds of those sales** (not the coins themselves) would be deposited into the General Fund;
    3. The purpose of the above was to *reduce the federal deficit” (an overriding objective that is hard to reconcile with the “trillion dollar coin trick”).

    **I understand there is an accounting argument on this that would likely add accounting fraud to the mix.

    So, I guess I could quibble with WW’s characterization of it as a “loophole” in the sense that that term suggests, perhaps, that the gambit might succeed; however, it does not appear to me that he’s given the matter a lot of thought and he does not say that directly.

    Good sense is apparently not so common these days; however, good sense would dictate that if Congress had intended to delegate (assuming such delegation is possible) the ability to unilaterally issue debt and/or raise the debt limit (powers that Congress is given under the Constitution and has exercised in various forms for over 200 years before and after the numismatic coin bill) it would have done so by the simple act of repealing or modifying the debt limit legislation (31 U.S.C. 3101) directly. Normally, the delegation of such an important power that the Constitution very expressly gives Congress, ,and that Congress has long exercised, would require an express delegation, and not one resting on a fantastic interpretation by a few crazed lunatics.

    http://www.gpo.gov/fdsys/pkg/CRPT-104hrpt660/pdf/CRPT-104hrpt660.pdf

    I understand that there are also a few out there that think the federal income tax is unconstitutional and therefore voluntary. I’d place this one in the same category. I guess one’s tendency to engage in fantasy is directly proportional to the outcome one desires. In this respect, I’m reminded that the whole crazy idea originated in MMT circles and they seem prone to pursuing things to certain pre-disposed ends, despite all evidence to the contrary.

    I’m not inclined to delve further for practical reasons that are well enshrined in the law, such as the general rule requiring “ripeness” and against “advisory opinions”, not to mention standing and jurisdiction, all of which serve the end of directing our time and energies to more useful endeavors.

    As for the surname “Darkbloom”, I agree, and I’m indeed fortunate given that normally one doesn’t have a lot of choice in the matter. I particularly like the juxtaposition of the two competing images “dark” and “bloom” that fit together within one neat little frame. There is also an oblique allusion to Leopold Bloom, at least for those in the know. And, who knows? Perhaps we’ll eventually have a “Darkbloom’s Day” to celebrate.

    But, enough of these literary musings. People might start to think that your narrator is one of those crazy lunatics, because there are more than a few of them around.

  68. Gravatar of Vivian Darkbloom Vivian Darkbloom
    8. January 2013 at 04:36

    Scott,

    I have also been remiss in addressing your subsequent comments, which were both civil and gracious. Nonetheless, I need to correct you on a couple of not-so-minor points.

    Your comments suggested, respectively, that I had “ridiculed” you and “demolished” you (both in the first person “me”). Nothing is further from the truth. First, had I done so, that would have been an illogical ad hominem argument. And, there’s nothing I hate worse than illogical arguments, ad hominem or not. I was attacking what I perceived to be a silly argument embedded in a silly comment and so that was the object of my derision and satire, properly used, can sometimes make that point effectively.

    Second, the fact that it was directed at your comment rather than something you wrote in your blog, per se, strikes me as inconsequential. Nota bene that this is an admission against interest. Were I to argue otherwise, I would be arguing for my own immunity.

    I alluded to some prior teaching stints and this reminds me that it was my custom to end courses with the following remark:

    “Now the course comes to a close. The work with this group has been a particularly pleasant association between the fountain of my voice and a garden of ears—some open, others closed, many very receptive, a few merely ornamental, but all of them human and divine”.

    Had I wished to ridicule you or demolish you, that would have been contrary to the spirit of the above, which, despite occasional lapses in practical application, I fervently believe in.

    Students always liked that. If you want, feel free to use it.

  69. Gravatar of Bill Woolsey Bill Woolsey
    8. January 2013 at 06:33

    Scott:

    You keep on talking about threatening to default.

    Why?

    When a debt limit is reached, there is no default.

    What happens is that current spending falls to current revenues.

    The budget is balanced.

    What is the problem?

    The President has to allocated the funds available according to what he considers most important.

    If Congress wants to take back control of priorities, it has to reduce the appropriation for things it considers less important.

    You claim that Congress can just cut spending or raise taxes is not correct. Or rather, then need 2/3 in both houses to do it.

    They can, of course, raise the taxes the President wants raised with a simple majority. But cutting spending the President doesn’t want cut takes a 2/3 vote.

    It works like this–say the House wants to reduce spending for Public TV. It passes a bill with some low level (even zero) spending. It goes to the Sentate. The Senate votes it down. It didn’t pass. If the Senate did pass it (which in practice can be blocked by 1/3) then it goes to the President. If he vetos it, then it takes 2/3 of both Houses to pass.

    But, you say, how can they spend anything if they don’t approve anything.

    What happens is that when they don’t pass a budget (which they haven’t) then all government spending stops. What they do is a continuing resolution, allowing the past budget to continue on.

    If they don’t pass that, then all government spending stops. Well, not really, just all the “nonessential” spending stops.

    And, of course, they have continued to pay interest and principle on the national debt when this has happened in the past.

    As best I can tell, you are buying into the big spending Democrat line on this hook, line, and sinker.

  70. Gravatar of ssumner ssumner
    8. January 2013 at 07:39

    Steve, I thought the way to avoid inflation is to RAISE the IOR. Why would a negative IOR help?

    K, You keep moving the goal posts. Suppose we don’t target the exchange rate, we just use QE, which you say doesn’t work. The day QE1 was announced in March 2009 the dollar fell 6 cents against the euro. So your claim now is that QE works, but for the wrong reason? I.e. are you claiming it works because it is a competitive devaluation? The problem with that argument is that an effective Woodfordian policy would also depreciate the dollar.

    You talk as if Bernanke’s QE is “my policy” whereas I actually support NGDP targeting. (Recall I’ve criticized Bernanke’s policy. I’ve said it’s better than nothing, as has Krugman.) I favor adjusting the monetary base at each and every moment in time until the forecast NGDP growth rate equals the target growth rate. I prefer market forecasts, but will use internal bank forecasts if that’s the only option.

    Woodford’s “contingent interest rate path” is inefficient for all the reasons that other intermediate targets are inefficient—you should directly target expectations of the goal variable for reasons discussed by Svensson. Still if Woodford uses that tool to target NGDPLT, it’s a vast improvement over current practice.

    Thanks Vivian—nice comments.

    Bill, Is Obama legally allowed to not spend money that Congress has authorized him to spend? I thought the courts had ruled that the President could not unilaterally cut spending? Why wouldn’t the President just punish the opposition party by withholding spending in those programs favored by the GOP, or in GOP Congressional districts? Could he unilaterally end one of the weapons projects that the administration opposes but Congress forced through for political pork reasons?

    It seems to me that we need to move the US toward a “civil society,” which means resolving issues like grownups, not spoiled children throwing a temper tantrum. It is Congress’s job to come up with a sensible budget. If they don’t, I’d rather borrow money until they come to their senses, rather than make Obama dictator of the US who can single-handedly decide which spending programs will be funded and which ones won’t.

    I really hope that Obama doesn’t give in to GOP blackmail, if he does they’ll blackmail him over and over again, and we’ll face one debt cliff after another.

  71. Gravatar of K K
    8. January 2013 at 09:09

    Scott,

    “You keep moving the goal posts.”

    If so, I certainly apologize. It’s a reprehensible debating tactic. My (admittedly self serving) impression is that your perception is a result of your misunderstanding of my initial comments, but I could certainly be wrong. If so, let this current and my previous comment be the definitive statement of what I believe.

    “The day QE1 was announced in March 2009 the dollar fell 6 cents against the euro.”

    It’s a really tough slog to disaggregate the impact of different elements of changes in monetary policy.  But Woodford does an admirable job of trying in the Jackson Hole paper. In the case of QE1 there was both the announcement of the balance sheet expansion but also a clear statement of dovish intent. The dollar did, in fact, drop by about 5% but the 10 year bond *rallied*, also by about nearly 5% or 50 bps or so, consistent with an expected 50 bps reduction in the short rate over a period of *10 years*! Woodford concludes (and I agree) that the stimulative cause was the effective change in the outlook for Fed rate policy, and not the quantitative outlook for the balance sheet. A cumulative reduction of 5% interest in the yield curve is, in fact, very consistent with a 5% drop in the value of the currency by simple carry trade arbitrage.

    “are you claiming it works because it is a competitive devaluation?”

    No. As discussed above, just forward rate guidance.

    “The problem with that argument is that an effective Woodfordian policy would also depreciate the dollar.”

    My feeling is that that’s the problem with *your* argument. If we can’t distinguish your mechanism from Woodford’s mechanism (I actually think we can), then I’m going to go with the one that I consider to be on more solid theoretical footing (i.e. Woodford’s).

    “You talk as if Bernanke’s QE is *my policy* whereas I actually support NGDP targeting… I favor adjusting the monetary base at each and every moment in time until the forecast NGDP growth rate equals the target growth rate.” “

    Your policy is still QE. Just that you favour a different *contingency* (the level of NGDP) than Bernanke (inflation above 2.5 or unemployment below 6.5). I don’t favour QE *at all* (nor does Woodford).

    “Woodford’s “contingent interest rate path” is inefficient for all the reasons that other intermediate targets are inefficient: you should directly target expectations of the goal variable for reasons discussed by Svensson.”

    The rate path is not the target any more than the quantity is the target. They should be seen as alternative policy *instruments*. At any moment there is mapping from a given policy interest rate to a given policy quantity. (Though the same is not necessarily true in the other direction.) Choosing a target and a policy instrument are two completely independent issues. Woodford has long advocated an “output adjusted price level target,” and now seems to be settling on an NGDPLT as a specific version of that. He wants to achieve that through a time consistent NGDP-contingent *rate* policy rule. You want a time consistent NGDP-contingent *money quantity* policy rule.

    As to the issue of what NGDP to target, I’m sure Woodford would be very happy targeting a futures contract. Again, totally different discussion from the policy instrument.

  72. Gravatar of Vivian Darkbloom Vivian Darkbloom
    8. January 2013 at 10:23

    ” It is Congress’s job to come up with a sensible budget.”

    I agree. But, before we even get to the “sensible” part, it’s Congress’ job to pass a budget in the first place. In the category of “it’s ok to thumb your nose at the law”, the Senate has been flaunting its legal obligation to even pass a budget for the past four years and as a result we’re living on Continuing Resolutions. The House, on the other hand, has at least passed budgets. Those budget proposals were defeated in the Senate along largely party lines. The Senate failed to even make a budget proposal of its own and bring it up for a vote.

    I don’t need to remind you who controls these respective Houses of Ill Repute; however, it might pay to remind you that the person you claim is being forced to be a dictator likely has it within his existing non-dictatorial powers the ability to ensure that his colleagues in the Senate pass a budget, sensible or not. While his last budget proposal was defeated 99-0 by the Senate, I did not detect a lot of effort given to advance an alternative “sensible” Senate budget that could pass, or at least be voted on. Meanwhile, a whole lot of effort was given to passing a trillion dollar plus health bill and raising taxes on the “rich”.

    “If they don’t, I’d rather borrow money until they come to their senses…”

    Borrowing money “till they come to their senses” strikes me as the existing strategy. Under that strategy, we’ve been waiting for them to come to their senses for several decades now. What makes you think continuing on the same path is going to change anything? I think you’re in for a long wait.

    “….rather than make Obama dictator of the US who can single-handedly decide which spending programs will be funded and which ones won’t.”

    I don’t like dictators either (or uncivil society); however, I fail to understand how one can advocate that the Chief Executive unilaterally utilize the “trillion dollar coin trick” if one is truly concerned about dictatorship. If Congress fails to raise the debt limit and the Chief Executive, as a consequence, is forced to make choices as to which spending programs will be given priority (after interest on the debt). *That* consequence strikes me as very foreseeable. Even you can see that coming; but I’m sure when Congress authorized the coining of platinum numismatic coins you would not have anticipated the “trillion dollar coin trick” (nor should you have). Thus, the fact that the President is given the task of making hard choices on spending programs strikes me as a more plausible as a (temporary) delegation of authority than the attempted theft of authority under the “trillion dollar coin trick”. There is a difference between giving power and seizing it, and I submit that’s an important criteria in evaluating whether someone is a “dictator”.

    “It seems to me that we need to move the US toward a “civil society,” which means resolving issues like grownups, not spoiled children throwing a temper tantrum.”

    And, Amen to that.

  73. Gravatar of Chuck E Chuck E
    8. January 2013 at 13:19

    Vivian,

    Well said!!!

  74. Gravatar of ssumner ssumner
    9. January 2013 at 07:04

    K, I responded to some of this in a more recent post, but I don’t agree with this.

    “Your policy is still QE. Just that you favour a different *contingency* (the level of NGDP) than Bernanke (inflation above 2.5 or unemployment below 6.5). I don’t favour QE *at all* (nor does Woodford).”

    Bernanke has a QE policy with a partly exogenous base, Woodford and I favor an endogenous base.

    As far as policy instruments, I favor replacing interest rates with the NGDP futures contracts. If Woodford eventually agrees that would be great.

    It would have also been nice if Woodford had done his WSJ editorial in late 2008 and early 2009, not early 2013, and it would have been nice if he’d castigated Bernanke and the Fed for ultra-tight mponetary policy at that time. Unfortunately only the market monetarists were outspoken crtitics of the tight money policy at that time. Most Keynesians were saying the Fed was out of ammunition, even though rates weren’t even zero.

    BTW, I prefer to talk in terms of interest rates being analogous to the NGDP forecast, not the base, because the Fed can’t set rates by waving a magic wand, they must adjust the base until the market rate equals the target rate. The adjustment is the base is the tool of monetary policy, the change in rates (and NGDP expectations) are effects of monetary policy. But I suppose the distinction between “instruments” and “targets” is vague.

    Vivian, I suppose it depends in what you see as the alternatives to the coin:

    1. Default–I see that as being even worse.

    2. Make Obama a dictator who can unilaterally decides where to spend money and where to not spend it. So he might choose to cut off spending in red states but not in blue states. I don’t much like that either.

    If someone can provide me with better alternatives, I’ll oppose the coin. BTW, if I were his political advisor I’d tell him not to do it, as the critics are right, it makes the US look like a banana republic. And the GOP will blink.

    Whether there is a budget or not, the GOP has signed off on the bloated Obama spending. They are afraid to block the expenditures in the House, even though they have the power to do so. That would be more reasonable than forcing a default, or forcing Obama to become dictator and have to take the heat for spending cuts.

    I agree that the Senate should be blamed for not passing a budget. Both parties are pretty dysfunctional.

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