What’s at stake: What started as an arcane idea on a finance blog a couple of months ago – that the debt ceiling crisis could be averted by exploiting a legislation designed to govern the issuance of commemorative coins, which allows the Treasury to mint platinum coins, and only platinum coins, in any denomination – has moved center stage in the punditry debate and gone viral on Twitter under the hashtags #MintTheCoin and #StopTheCoin. The idea has gotten so much traction that U.S. Rep. Greg Walden (R-Ore.) announced plans to introduce a bill to modify the current legislation on commemorative coins to prevent such a scheme and White House Press Secretary Jay Carney came under heavy fire during the daily news briefing to give the official position.
Ezra Klein gives a refresher: to avoid running into the debt ceiling in the next couple of months, the Treasury secretary could exploit a legal loophole, create a platinum coin, assign it a value of $1 trillion or some other very high number, and deposit it at the Fed, thus enabling the government to carry out its previously promised tax and spending policies without broaching the legal cap on debt issuance.
Carlos Mucha – who first articulated this option in a 2010 comment on Brad DeLong’s blog according to history of the idea put together by Devin Smith – wrote that the Treasury isn’t authorized to just “print” money, the Federal Reserve Act gives that power to the Fed. However, the Coinage Act grants the Secretary of the Treasury rather broad coin seigniorage authority.
“The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.””
Philip Diehl – the former Mint director and Treasury chief of staff wrote the platinum coin law – writes on the Wonkblog that writes that any court challenge is likely to be quickly dismissed since (1) authority to mint the coin is firmly rooted in law that itself is grounded in the expressed constitutional powers of Congress, (2) Treasury has routinely exercised this authority since the birth of the republic, and (3) the accounting treatment of the coin is entirely routine.
Laurence H. Tribe (HT Paul Krugman) – Professor of Law at Harvard University – thinks it makes no sense to think about this as some sort of “loophole” issue. Using the statute this way doesn’t entail exploiting a loophole; it entails just reading the plain language that Congress used. The statute clearly does authorize the issuance of trillion-dollar coins. First, the statute itself doesn’t set any limit on coin value. Second, other clauses of 31 USC §5112 do set such limits, but §5112(k) — dealing with platinum coins — does not. So expressio unius strengthens the inference that there isn’t any limit here. Of course, Congress probably didn’t have trillion-dollar coins in mind, but there’s no textual or other legal basis for importing this probable intention into the statute.
Implementing the idea
Greg Ip writes that coins are a liability of the Treasury, not a liability of the Fed, and are therefore not part of the monetary base. In fact, in economic terms, coins are analogous to perpetual, zero coupon Treasury bonds. The Treasury can issue coins to the public and use the proceeds to finance the budget, just as if it issued bonds.
Monetary Realism writes that if Treasury were to mint and then deposit a $ 1 trillion Platinum Coin at the Federal Reserve, its deposit account at the Fed would be credited with $ 1 trillion in new balances.
One option might be for Treasury to buy back Treasury debt now held by the Fed (assuming appropriate available supply from Fed inventory). That would drop utilization under the current debt ceiling by $ 1 trillion, allowing Treasury to “reload” on new Treasury issuance. This would allow Treasury to execute already authorized spending without the overhang of imminent debt ceiling “negotiations”. One disadvantage of that approach is that it constrains the Fed’s flexibility in using Treasury bond inventories to best advantage in a complex monetary policy environment. Those inventories would suddenly drop.
The other option is for Treasury to conduct already authorized spending from a now flush bank account balance at the Fed. Then, that money would gradually find its way into the deposit liability and reserve accounts of the banking system. The resulting gradual increase in bank reserve account balances is a form of quantitative easing. Instead of buying bonds, the Fed has bought the coin.
Philip Diehl – the former Mint director and Treasury chief of staff wrote the platinum coin law – writes on the Wonkblog that the accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the Treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. Once the debt limit is raised, the Fed could ship the coin back to the Mint where the accounting treatment would be reversed and the coin melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.
Ryan Avent writes that the first oddity is the debt ceiling: it is possible for the government to pass spending and tax bills, which lead to an illegal amount of accumulated debt. Once the tax and spending choices are made, the resulting debt load is a fait accompli, a residual. Yet said elected officials have also seen fit to pass a law declaring that debt must fall below a specific limit. Mike Konczal writes that, technically, we’ve already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money.
Paul Krugman writes that Barack Obama will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous. The decision should be obvious. So if the 14th amendment solution — simply declaring that the debt ceiling is unconstitutional — isn’t workable, go with the coin.
Ryan Avent writes that the most compelling argument for the solution is that while it seems both risky and bonkersit is less risky and bonkers than a continued series of showdowns over the debt limit, any one of which might send America into recession or worse. Avent further notes that there is a proud history of presidents doing monetarily “crazy” things with generally salutary effects. The best examples are the decisions by Presidents Roosevelt and Nixon to suspend gold payments.
Mark Thoma writes that the key to winning the public battle is to make absolutely sure the public knows that it is only being done because the other side refuses to play fair, refuses to play by the explicit and implicit rules of political engagement. Putting John Boehner’s face on the coin, as Paul Krugman suggested, would certainly be a step in that direction.
Felix Salmon writes that there’s a reason why the proponents of the platinum-coin approach are generally economists, or at least economically-minded. The idea makes gloriously elegant economic sense, and attempts to shoot it down on economic grounds generally fail miserably. You can try a legal tack instead, but that doesn’t work much better: the coin is as logically robust as it is constitutionally stupid. But this move would effectively mark the demise of the three-branch system of government, by allowing the executive branch to simply steamroller the rights and privileges of the legislative branch.
Kevin Drum wonders if this is really the road liberals want to go down. Do they really want to be on record endorsing the idea that if a president doesn’t get his way, he should simply twist the law like a pretzel and essentially do what he wants by fiat?
Ezra Klein writes that the interesting question is whether that would show up, either immediately or over time, in the form of higher borrowing costs. I suspect it would, even if not immediately, but this is the realm of guesswork.
Trading bad ideas
Josh Barro writes that Barack Obama should offer to sign a bill revoking his authority to issue platinum coins – so long as that bill also abolishes the debt ceiling. The executive branch will give up its unwarranted power to print if the legislative branch will give up its unwarranted restriction on borrowing to cover already appropriated obligations.
Mike Konczal writes that, instead of a trillion-dollar coin, what if the president said, “I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make.” It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public.
I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research (NBER) in the Public economics group. You can follow me on twitter @omzidar.
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