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posted on 23 October 2015

The Platinum Coin Returns

by Joseph M. Firestone, New Economic Perspectives

Upon my oath, I didn't intend to bring back the coin proposal until much later in the renewed process of Republican hostage-taking over the debt ceiling.

After all, there's not much chance that the President would ever use the platinum coin option, because his budget policy direction of getting ever closer to a budget surplus, is best served by a "forced" compromise with the Republicans, that results in another few hundred billion in spending cuts for 2016, while allowing him to place the blame on them for that outcome. Using the platinum coin option would not have that result, because it would deliver a clear victory to him.

Of course, he doesn't want a default due to Republican brinksmanship either, so if the Republicans do drag everyone too close to the cliff, then he may decide to take some extraordinary measures and the coin is one that is available, so it's conceivable that he might choose this undoubtedly, from his point of view, distasteful option. It is for this reason, I suppose, that the Brookings Institution is warning him off the coin to weight his choice towards some more conventional approach.

The Brookings Warning

The warning was delivered in the form of a paper by Philip A. Wallach, in which after devoting a good deal of attention to the historical and current political context of the coming probable crisis over the Treasury breaching the debt ceiling law he asserts the "enormity of the threat posed by a failed debt ceiling negotiation." But nevertheless he also asserts that any of the solutions proposed by those advocating for a way around such a crisis would not work because:

. . . the political dynamics of the debt ceiling standoffs make it so that any deus ex machina capable of extracting us from our current fights will strike people as deeply illegitimate, heighten political tensions, and potentially accelerate the constitutional crisis it is meant to ward off. A brief consideration of two of the most-discussed options shows why this is the case.

This is not really an argument, but a conjecture, and one that is a matter of opinion, certainly not backed by any empirical evidence, and not blindingly obvious to many people, including myself. Wallach claims this conjecture applies to all of the main proposals for getting around the debt ceiling, but focuses on two: first, a 14th Amendment-based challenge to the debt ceiling law accompanied by continuing debt issuance in violation of the debt ceiling legislation; and second, the President using the Platinum Coin authority, accorded to the Treasury in a 1996 law to have the Treasury Secretary order the US Mint to create a trillion dollar platinum coin, deposit it at the Federal Reserve, and then use the seigniorage from the coin to make debt payments, and to deficit spend to avert the current debt ceiling crisis.

I won't discuss the constitutional challenge to the debt ceiling law using the 14th amendment in this post, because, for reasons I gave in much detail in my book on this subject, I don't think it is a valid challenge to the law, until all other possible solutions to the debt ceiling crisis have been tried. In other words, I think that the 14th amendment move is a last resort, and that if the Court decides a case on this correctly, then it would throw out the breach of the debt ceiling as unconstitutional, if other ways of resolving the crisis by avoiding the debt ceiling rather than relying on the 14th, were available or remained untested.

So, my view is that there is a temporal priority here, and a constitutional challenge based on the 14th amendment isn't even appropriate, unless alternatives like consols, the platinum coin, and other expedients are tried first and tested for constitutionality. For this reason, I'll restrict my discussion here to consideration of Wallach's critique of a platinum coin-based solution. Readers who are interested in a broad consideration of all the main alternatives can consult my book.

Wallach continues with this statement which he applies to all alternatives proposed to get around the debt ceiling law including using platinum coins:

This thinking is almost comically blind to the potential downsides of such a declaration, however. Congress, which has always worked to resolve debt ceiling confrontations in the past, would rightly see the executive branch (or judiciary) as attempting to usurp its constitutional borrowing power, now and forever after. There would be no way to de-escalate what would quickly become one of the most significant interbranch conflicts in American history, and it seems hard to imagine that Congress would have any other recourse than impeachment. As this epic battle played out, U.S. debt repayments would look less certain than ever and the country's international reputation would (justifiably) plummet.

This is another political judgment of questionable value from Wallach, because it would be a highly partisan Congress that would provide such an interpretation of the use of an extraordinary measure to lessen or eliminate the leverage in negotiation they gain from using the debt ceiling law in the way they have. The American people are very unlikely to back their view that a counter move to free the government from Republican hostage-taking was a usurpation of power by the Executive, since it is probably the majority view now that using the debt ceiling to extract cuts in Medicare, Social Security, and other entitlements is a usurpation of power by a Congress, which was unwilling to get this done through its control of appropriations, and was now coming back to take a second, illegitimate bite at the apple, in spite of the opposition of a substantial majority of people to such cuts as measured in poll after poll.

How the legitimacy question would play itself out, however, surely depends on the particular alternative solution that the Administration decided to push. For example, if the President gave orders for consols to be issued by the Treasury department, I think it is very unlikely that the Republicans in Congress would be able to whip up a great deal of rage in the country to oppose this, since there is no basis at all in law for saying that the Administration's debt issuance functions exclude issuing debt that is not subject to the limit, because its principal never has to be re-paid.

So, I think that all the public is likely to conclude from such a move is that just as the Republicans were pulling a fast one, and using a mere technicality, to get cuts in popular discretionary and safety net programs, the President was replying with a perfectly legal fast one of his own, using a technicality to avoid a government shutdown. Very likely, a majority of people would conclude that turnabout is fair play if consols were involved.

And it's very unlikely that Congress would contest such a move in Court, since the case would be very weak, and the Courts would likely either refuse to intervene in such a dispute or decide that Congress as a whole has an authoritative remedy, namely specifically, prohibiting the practice of issuing consols. So, where is the "constitutional crisis" in all this. Not every instance of disagreement between the Executive and the Congress is a "constitutional crisis" is it?

Wallach raises the issue of impeachment regarding the President's using an extraordinary measure to get around the debt ceiling law. Well, the Republican Congress can certainly try to impeach this President beginning one year before the next presidential election. But what are the chances of their doing that?

Their doing so, would certainly be seen as a partisan effort in response to a government shutdown crisis, precipitated by a highly partisan Republican Congress. By the time they got to the impeachment details, proceedings would have to be held in 2016, and the Republicans would be getting pilloried once again as the do-nothing party that doesn't do anything but investigate Democrats, waste time in Congress, cause government shutdowns, and generally refuse to do the job of governing they were elected to do. What would that do to their chances of winning the presidency and holding the White House in 2016? What would that do to their chances of holding the Senate? What would that do even to their chances of continuing to hold the House? And what would happen in the 2016 elections to the Republicans who were the ringleaders in the impeachment proceedings?

In short, an impeachment move in retaliation for the President using a "trick" of some kind to save cuts to popular programs would be political suicide that whoever is the new Speaker of the House will not allow the Republicans to commit. And surely, Mitch McConnell would not be so politically stupid to give up whatever chance he may still have to sit once more in the Majority Leader's Chair, just to chase the Republican's white whale one more time, before a new President takes office.

Moving to the the platinum coin option specifically, Wallach says:

Very similar problems would attend any attempt to exploit legal technicalities as a way out of the debt ceiling bind. The most popular of these has been the platinum coin option, in which the Treasury would use a legal provision designed to allow it to create platinum coins of any denomination to mint coins with $1 trillion (or more) in face value, which could then be credited to Treasury's accounts and allow timely payments to be made without raising any over-the-limit debt. Proponents of the idea concede that Congress never meant to give the Treasury such an unbounded power, but point out that it was put in place to generate seigniorage income (government profit reaped through issuing currency). And they argue that exploiting this loophole has policy consequences less egregious than playing out repeated debt ceiling confrontations. . . .

One person's "legal technicality" is another person's plain language in the law. The language clearly says that the Secretary has the discretion to specify the face value of any platinum coin he mandates be minted. That is not a "technicality" it is what the law says.

It is of no moment that no individual Congressman intended to give the Executive such broad authority. The fact is that Congress as a collective voted to give that authority to the Executive and then the President signed the bill into law. So, it is the law! Now the question is whether the President will use his authority or not. It is not whether he has that authority.

Once again this ignores the way in which a small chance of debt ceiling negotiation breakdown is replaced with an absolute certainty that Congress would feel that the president had inappropriately usurped powers that belong with the people's branch. Once again de-escalation apart from complete congressional acceptance would be very difficult (though at least in this case statutory changes could clearly prohibit the maneuver in the future), and impeachment would be very likely.

This statement doesn't take into account either the dynamics of the debt ceiling negotiation process, or the mechanics associated with the particular measure the Treasury might use. If the President were to use the platinum coin option, then this could be done within a few days of the Treasury running out of "head room" and being forced into auctions where it might lose control over the price of the debt instruments it sells. So there would be ample time for negotiations to be successful before then.

The President could also provide repeated warnings to the Congress that time was running out and that he would be constrained to take extraordinary measures to fulfill his constitutional duties to spend duly appropriated Congressional mandate. He could leave them guessing about exactly what he would do, and he could hold the exact measure he would take very, very close.

If the platinum coin were used, then no one need know that until the coin hit the Mint's account at the New York Fed, and the seigniorage was then swept into the Treasury General Account (TGA). Only then, would what the President had done become public, and only then might negotiations break down.

And even then, negotiations would not have to break down, because the President could talk to the nation about why he was forced to mint the coin, offering his pledge to the people and to Congress, that he would not use the seigniorage in the TGA to either pay debt or cover deficit spending, provided Congress lifts the debt ceiling, and gives its pledge that it will respect the Constitution and obey the 14th amendment, Section 4's stricture against questioning the debt of the United States, during the remainder of his term.

And, if the President is wise, then he will have the Treasury Secretary cause the minting of a platinum coin having a face value that is large enough to give Congress no incentive to remove the platinum coin seigniorage authority from the Executive branch, say a coin with a face value of $100 Trillion. That money could then sit in the TGA as a guarantee that debt ceiling political hostage-taking will be gone from the American political system for a long time to come.

A good rule of thumb for executives in troubled times: if you can help it, don't do anything that can plausibly be characterized as a coup. Both strategies just discussed fail this test. For all of the certainty summoned by the champions of the "solutions" that they are legally in the right, they err in thinking that legal correctness is the crux of the matter. Such high stakes constitutional law is always to a large degree constitutional politics, and the maneuvers they propose would unquestionably escalate hostilities in our already troubled polity. The Obama administration's explicit rejection of these options thus shows real prudence. . . .

I am not of the opinion that the President's actions in the 2011 and 2013 debt ceiling crises have shown "prudence" and I think, that is yet one more mere opinion from Philip Wallach, solemnly intoned, but not shown to have any substance. Instead, I think that the President's actions risked what has now become a series of hostage-takings that have cost the American people dearly and still have not ended debt ceiling politics. Nor have they avoided an escalation of hostilities with the Republicans, who have continued emitting extreme hostility toward the President, since he took office, and only intensified that hostility once they took over the House after the election of 2010, and then again, after he won in 2012.

In other words, I think he gained nothing with his "prudence" when it comes to de-fusing the hostilities. What he gained however, was a good many opportunities to perform ritual dances with the Republicans to reduce deficit spending at the expense of the poor and the middle class, while blaming those same Republicans alone for his dedicated efforts to reduce the deficit in a display of faux fiscal responsibility, which he now celebrates at every opportunity, whenever he beats CBO's projections about how rapidly the deficit will shrink.

Instead of negotiating with the Republicans, the President should have used the coin in the Summer of 2011 when the coin proposals first surfaced. By not doing so, he played a critical part in the sequester, the fiscal cliff, and the spending cuts that damaged the economy seriously, slowed the recovery and delivered austerity to many.

It would have been much more "prudent" to have acted quickly and decisively in the Summer of 2011 to fill the public purse so that Congress could no longer cry "we're running out of money," to rationalize their cruel and fiscally irresponsible budget cutting. And yes, the President would have risked impeachment by the Republicans going into the elections of 2012, if he had done that. But I think the risk would have been worth it, and that it was the President's duty to take it because that is what would have been best for the country.

Constitutional Politics

I do agree with Wallach that the solutions to debt ceiling crises are not just a matter of law, but also a matter of constitutional politics. But, I also think that the constitutional politics would have worked out much in favor of the President, especially if he had minted a coin with the kind of face value I proposed here. Had he done that, then a $100 T initial balance in the TGA, followed by very rapid payoff of the Intra-governmental debt, and the debt owned by the Federal Reserve would have sent two clear messages to the people. First, the idea that the Federal Government can run out of money is a fiscal myth (see my newest book); and second, the Federal Government now had enough money in its spending to both pay off "the debt" entirely, over a period of years, as it fell due, and also to cover any conceivable deficit spending on the part of the Congress for many years in the future.

The first message would have removed the debt issue from the political table for a very long time and perhaps for good, if the Treasury retained the authority to mint platinum coins for good. And the second, would have removed any possible claim that the Government of the United States, could not afford a proposed fiscal policy, because the money wasn't there.

Austerity advocates would in those circumstances have been able to argue against spending proposals on grounds of their undesirable effects; but the filter of deficit neutrality repressing fiscal policy for so long would also have been removed from American politics, and that would have been a great legacy for this President whether or not it would have cost him impeachment -- a possibility which I strongly believe would never have come about because of the great popularity he would likely have gained by sending these two clear messages and disarming the Republican fiscal myths blocking full economic recovery.

Finally, The overall impression I received from this Brookings effort of debt ceiling issues is that its orientation was profoundly conservative in the foundational sense that it assumes that change in institutional practices and procedures even when authorized by law is dangerous, disturbing and almost always worse than letting real problems fester over a period of years in such a way that people who are not among the wealthy suffer a deterioration in their conditions amidst an exacerbation of inequality over a period of years. Wallach is more worried about the consequences of a disagreement between the Executive and the Congress, and more worried about maintaining fiscal conservatism than he is about that. In this he shows the growing Brookings bias belying its long-standing reputation as an "objective" think tank that represents a "liberal" or "progressive" point of view.

When Wallach says:

A good rule of thumb for executives in troubled times: if you can help it, don't do anything that can plausibly be characterized as a coup. Both strategies just discussed fail this test.

I don't think that Wallach is giving us a test for "progressive" executives. Rather, I think that is a traditional (not a tea party) conservative's test. Progressives are more likely to think that today's Republican party is always claiming that the President is guilty of a coup, and is acting beyond his constitutional authority. So, what's new?

I noted the word "plausibly" in that quote, well enough. But, a progressive will wonder what that means in the context of minting the platinum coin. Yes, it is a new procedure for ensuring Treasury liquidity, but it is authorized by Law, and, in addition, it leaves intact the constitutional prerogative of the Congress to control the purse strings. Even with a $100 T coin, the Executive still cannot spend anything Congress doesn't appropriate. The Congress still retains the purse strings, even if they are the strings to a full purse. Where is the coup in all this? I don't see it, and I doubt that many other Americans will see it either.

(Cross-posted from New Economic Perspectives.)

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