The Fine Art of Starving the Beast

Feed me. (image: howzey/flickr)

First they convince us that government borrowing is necessary to inhibit inflation. Then they max out the nation’s credit card, so the government can’t borrow any more. And then Grover starts filling his bathtub.

Bizarrely, almost all mainstream economists agree that the federal government has “a printing press” with which it can print and issue money that can be used to pay its bills, e.g.:

  • * Alan Greenspan (8/07/2011): “The United States can pay any debt it has because we can always print money to do that.”
  • * Paul Krugman (4/21/2011): “[A] state must, one way or another, collect enough revenue to pay for its spending. Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money.”
  • * James K Galbraith (4/18/2011): “[Since the US prints its own currency or simply issues electronic payments whenever it needs it:] As long as there is diesel fuel to power up the back-up generators that run the government’s computers, they will have the money to back their own bonds.”
  • * Ben Bernanke (11/21/2002): “[T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

But, an economist is often viewed as irresponsible if he/she doesn’t instantly note that simply printing money would be irresponsible. There’s always a hushed tone and a sudden shift in subject indicating that doing so would be unsafe, immoral, and/or irresponsible. In fact, Krugman called out Galbraith for his remark above in spite of the fact that Krugman himself said the much the same thing three days later. The difference was the Krugman immediately appended the obligatory warning against “abuse” of the printing press and insisted that the reason we collect taxes is “to prevent insolvency,” which is an absurd notion if the federal government indeed can issue money to pay its bills.

Rather, the responsible thing to do is to borrow the money to cover tax shortfalls (deficits). But why? Per Brad DeLong

From its beginning the Keynesian Revolution brought fears of inflation. Before the ink was dry on the copies of Keynes’s General Theory, Jacob Viner already warned that:

…[i]n a world organized in accordance with Keynes’ specifications there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment solved if the printing press could maintain a constant lead…

A quarter century later in his AEA presidential address Arthur Burns argued that Viner’s fears had come true: that the post-World War II world was one of constant wage-push inflation.

Viner’s and Burns’s fears have been developed and sharpened by Finn Kydland and Edward Prescott, who pointed out that a benevolent central bank possessing discretion and the ability to induce unanticipated shifts in aggregate demand will be under great temptation to try to take advantage of any short-run Phillips curve boost employment and production. The rational expectations equilibrium will be dissipative: workers and managers will expect such actions from the central bank, and in equilibrium production and unemployment will be unaffected but inflation will be higher than desirable.

This Kydland-Prescott framework suggests two ways to counter this institutional bias towards inflation created by central bank possession of discretion and concern over high unemployment. First– Kydland and Prescott’s preference–make sure central banks are bound by rules and do not possess discretion. Second–a line of thought associated with Ken Rogoff–appoint central bankers who are unconcerned high unemployment.

And, indeed, we now have central bankers who care little about unemployment, and we have an unwritten rule that all tax shortfalls (deficits) must be covered by borrowing, and then there’s also a limit on that borrowing. Also, there’s a written rule that the Treasury cannot borrow directly from the Fed, i.e., the Fed must purchase any Treasuries that it acquires on the open market and the Treasuries that the Fed owns count toward the government’s debt limit.

Some economists sincerely believe that borrowing is less inflationary than priting new money. Krugman gets explicit about this and openly claims that government borrowing retards inflation, ignoring MMTers’ observation that a bond holder can always pawn his bonds at a bank in exchange for new money freshly issued on the spot by that bank.

It’s an ironic fact that the federal government has no such “printing press.” The Federal Reserve issues paper dollars but is not allowed to pay the Treasury’s bills with them. It can, like any bank, create money by issuing credit in exchange for IOUs, e.g., Treasury bonds.

But that irony is irrelevant, because in 1996 Congress gave the Treasury the power to mint coins of arbitrary value. Visibly, it makes no difference whether the Treasury prints money to pay its bills or mints it. In either case, the money gets deposited into the Treasury’s account at the Fed, from which the government’s bills get paid. Nevertheless, nearly all financial journalists feel compelled to giggle at the mere mention of minting large-value coins to fund the government’s spending. By contrast, the whole idea makes me want to cry. Why, in God’s name, are we starving our poor, closing our schools, leaving citizens homeless and without medical care, but we’re still spending $400 billion per year on interest on a national debt that serves no purpose other than to transfer wealth from those who have less to those who have more?

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