Friday, January 11, 2013

How Obama Can do an 'End Run' Around the 'Pukes in the Debt Ceiling Battle

It was amusing to see extremist anti-tax troglydyte Grover Norquist on a TV spot recently ( replayed on the Ed Schultz show) yapping about how the GOP House could hold Obama hostage to spending cuts by bringing up the debt ceiling as a lever every month. He went on to bloviate:"And only when they do what we demand, with those cuts, will we raise their allowance!"

Hey, brainiac! There's no "allowance"! The increase in the debt ceiling is to ensure repayment of the money already spent! It is money you OWE, birdbrain!

Here are some other lesser known facts about our debt before I go on to show how Obama can do an end run around these Goopr fools without having to have new Treasury Sec Jack Lew mint a $1 trillion platinum coin, or for Obama to invoke the 14th amendment and probably incite impeachment proceedings.

- Of the $16.3 trillion up to today, only $5.5 trillion is owed to external nations (e.g. China, Japan etc.)

- $6  trillion is owed to individuals within the country - as in federal pensions ($2.9 trillion) and Social Security (to its Trust Fund) $3.1 trillion, from borrowing to support "wars"

- Another $4.8 trillion is owed to investors within the country, including to bond holders (Treasury bonds and bills) and others.

Technically speaking then, the true national debt (as defined as being owed to outside nations, interests) is only 33.7% of the total. I mention this because this is how most other nations measure their national debt. They do not reckon in what they owe themselves, internally! (For example, Switzerland)

Obviously, as may be seen from the above, several things pop into view:

1) A good chunk of the money, e.g. for wars in Afghanistan and Iraq, was raided from Social Security monies, the Trust Fund namely - which trillions the government now owes beneficiaries.

2) The canard that the Social Security Trust Fund bonds are only "IOUs" cannot possibly be true if they are in fact counted towards the debt! On the other hand, if they were "only" IOUs and possessed no fiscal gravitas, then that $3.1 trillion would be subtracted so we'd "only"have a deficit of $13.2 trillion. Bottom line? If we measured national debt and deficits in the standard ways other nations do there wouldn't have been half the kerfuffle about it. (And since Social Security is funded separately, so long as the payroll tax is there at 6.2%, then it can't contribute to the debt nor does it have any creditors.)

Now how can Obama do his end run and come out ahead in the upcoming debt ceiling brouhaha? The solution was recently offered by Edward D. Kleinbard, a former chief of staff at the Congressional Joint Committee on Taxation, and currently a law professor at the University of Southern California.

He recommends that President Obama threaten to issue scrip or  “registered warrants”,  to issue to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.  This money would be as good as actual hard currency or any electronic input. Best part?  Scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

How ingenious can you get? Much more sophisticated than having to go out and  mint a trillion dollar coin, eh? (Which, however, is permitted under several obscure clauses in the Constitution to do with the duties of the Treasury Secretary as pertaining to minting coins).

Of course there is the possible problem of confusion with actual Treasury debt. Hence, to be consistent with the law governing claims against the United States more generally the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

Finally, as the professor notes: "the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long."

Kleinbard does point out that the federal "Anti-Assignment Act" generally prohibits the transfer of claims against the United States from one private actor to another, but "the government could waive the act’s application, which is what the president would do here".  Ingenious!

Kleinbard agrees that the strategy "may sound far-fetched, but it has been used before: in fact, California relied on it as recently as 2009."  Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors.

 Kleinbard adds:

"A federal scrip program, importantly, would not explicitly challenge any constitutional allocation of powers. Nor would there be confusion in the marketplace between valid Treasury bonds and this new paper, which would have a different name, financial terms and legal status. And because the scrip would be transferable, claimants forced to accept it would be able to turn it into immediate cash in private markets, for as long as the Treasury was unable to issue new debt."
Lastly, it is a way of doing an 'end run' in the oncoming debt ceiling crisis, but clearly can't be a final solution.In Prof. Kleinbard's words: "It would be the least awful way to defang the most extortionate demands of Congressional hard-liners — and one that would not permanently damage America’s fiscal standing in the world."
Let us hope Obama uses it when the time comes, as opposed to capitulating to Repuke demands as he did in 2011! 

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