The Platinum Coin Spit-Take and Other Debt Ceiling Lunacy
by Neil H. Buchanan
The latest reporting from the U.S. indicates that Republicans have offered to pause their debt ceiling obstructionism, which had threatened to create economic and constitutional crises on October 18, until sometime in December. Among other things, this means that my phone might stop ringing for the next two months. Woo hoo!
What is left to say? Plenty. Here, I want to discuss a few of the truly silliest arguments that have arisen in this latest go-round on the debt ceiling. As the headline to this column suggests, there was one moment in particular when I actually did a spit-take, and there were certainly others that qualified as utterly puzzling if not downright goofy. Who said legal analysis is never fun?
The last stages of the most recent Republican-manufactured madness included a surprisingly large amount of discussion about whether the Biden Administration could avert a crisis by minting a platinum coin of some large denomination (the always-quoted number being one trillion dollars). The late-night comedians joked about it, some pundits endorsed it, and then the Treasury Secretary rejected it.
But because it was "a story," and because our body of writing about the debt ceiling has included some analysis of what I call the Big Coin option, various reporters asked Professor Dorf and me for our respective takes on that oddball possibility.
As soon as it became clear that the platinum coin thing would once again become a hot topic, I dusted off our arguments and published a Verdict column two days ago: "Only the Most Extreme Debt Ceiling Insanity Could Turn the ‘Big Coin Option’ into the Least-Bad Choice: So, Be Prepared!" As I drafted the column, I was struck by the sad reality that absolutely nothing had changed since this gambit first came up a decade ago. Not only had we made all of the arguments back then that can be made, but the press's collective inability to understand virtually every aspect of this topic -- regarding the Big Coin option but also the debt ceiling more generally, and even the most basic elements of public debt -- continues to astonish. The deja vu was depressing.
For example, as Professor Dorf noted in yesterday's column, reporters consistently act as if the only way to analyze the debt ceiling statute's constitutionality is by invoking the Fourteenth Amendment. It is beyond muscle memory with these people. They hear "unconstitutional" in this context and immediately say, "Oh, you mean the Fourteenth Amendment thing?" No, not the Fourteenth Amendment thing, as we have said over and over and over.
Indeed, even after I spoke to a Wall Street Journal reporter at great length, emphasizing that the Fourteenth Amendment argument was not necessary to understand the constitutional case and then carefully explaining the other arguments, the resulting article was headlined: From a Trillion-Dollar Coin to Invoking the 14th Amendment, How the U.S. Could Address the Debt Ceiling. The article was actually quite good on its own terms, but the only Constitution-based discussion was indeed the Fourteenth Amendment argument, quoting me accurately but ignoring every other constitutional claim.
That is not to say that the Fourteenth Amendment argument is bad or wrong. It is simply unnecessary, and it ends up distracting from the real stakes, making it seem that there is some obscure provision from the Reconstruction Era that could be trotted out as an opportunistic work-around. That the debt ceiling's existence threatens core concepts of separation of powers is the real issue, but I have yet to meet a reporter who puts that idea front and center -- and as I noted, most do not even mention it.
Still, these rote invocations of the Fourteenth Amendment can at times provide some amusement. For example, in a CQ Roll Call piece early in the current cycle of reporting about the debt ceiling, the reporter quoted one of the press's favorite sources for the right-wing point of view, law professor Ilya Shapiro, as follows: "The 14th Amendment doesn’t authorize the taking of debt. That’s the bottom
line."
That is at best a clumsy straw man argument. Yes, it is certainly true that the Fourteenth Amendment does not affirmatively authorize additional debt, but it does forbid Congress from passing a law that brings the validity of the public debt into question. What authorizes additional debt is that Congress ordered the president to spend more than the Treasury will collect in taxes, which can only be done by borrowing those funds. Any law that forbids the president from obeying those laws is unconstitutional (again, for several reasons).
But that kind of specious non-argument is nothing compared to some other lowlights in the last week. In this week's Verdict piece, I responded to a guffaw-inducing claim in what was supposed to be a straight news piece in Axios. I wrote:
[The Axios reporter] somehow came up with this: "Even if it’s legally sound, no one knows whether it’s physically possible to mint a platinum coin between now and Oct. 18." What?! That could be done in an hour. The whole point of the gambit is that minting a new coin would be quick and easy, especially because the coin need not even have anything stamped into it. The Treasury could just as well toss a lump of metal on a table with "platinum" written on it in crayon, with a piece of paper next to it reading: "This is our new trillion-dollar coin."
Even that was not the most foolish thing I read, however. The actual spit-take moment came as I was reading what was otherwise a fine, workmanlike news article in The Washington Post:
A major concern for economists is hyperinflation. Minting the $1 trillion coin would be like creating money out of thin air. When all that new money poofs into existence, the other currency in circulation becomes less valuable. That could hurt consumers, who are already dealing with price inflation.
I honestly do not know whether the ridiculousness of that paragraph is obvious to non-economists, but I assure you all that it is a howler. After I wiped the coffee off my shirt, I jotted down a note to myself: "Oh my GOD, the stupidity!!" Why? Most basically, because money is always created out of thin air. This applies as much to commodity-based money like gold as to so-called fiat currencies like, well, every major currency in existence today (dollars, euros, pounds, yen, yada yada yada).
But since we are talking about the U.S. dollar in 2021, I will focus on that. How does this reporter think the Federal Reserve creates dollars under normal circumstances? It buys Treasury securities by creating additional units of something that we all recognize as money, which the Fed creates by fiat. There is nothing wrong with creating money from thin air, because again, all money is ephemeral in exactly the same way. Acting as though minting the Big Coin would be awful because it would "would be like creating money out of thin air" is beyond fatuous.
Even more giggle-triggering is the idea that doing this would be hyper-inflationary, or inflationary in any way at all. "When all that money poofs into existence" (in the reporter's memorable words), the new money sits in the Treasury's account at the Fed. It can only affect the economy (including possibly changing the price level) when it is spent, but Treasury will not suddenly go on a spree because it has a trillion-dollar line of credit at the Fed. Treasury can only spend exactly as much as the laws that Congress has passed require it to spend.
No serious analysis indicates that the currently authorized spending plans are inflationary (and even the panicky arguments that the non-yet-passed Biden agenda would be inflationary are unserious), but even if they are, that has nothing to do with whether the spending is financed by a Big Coin. More generally, for all we know, there could be a vault somewhere with a quadrillion dollars in it. If there were such a thing, however, its existence would not threaten to cause ruinous inflation. It is just sitting there.
And although what came next was not laughably wrong, the ensuing two paragraphs did include this:
Then there’s the question of what a $1 trillion coin would mean for U.S. monetary and fiscal policy. Monetary policy means making decisions about the money in the economy. That’s mostly left up to the Federal Reserve, which is somewhat insulated from political tinkering. Fiscal policy means making decisions about what the government spends money on. That’s an entirely political process left up to Congress and the president.
The $1 trillion coin would completely mix the two. It would have the president use monetary policy (creating new money) to solve a fiscal problem (the government is running out of borrowing capacity).
The Fed "monetizes" the debt whenever it wants, through what are called open-market operations, in which the Fed buys Treasury securities. That, in fact, is what the Treasury has to count on if the investing public does not buy enough bonds on a given day. Little-known fact: Of the $22 trillion of federal debt "held by the public," approaching six trillion of that is held by the Fed (which, for this purpose, is part of the public). The Big Coin is a terrible idea, but not because it would "completely mix" monetary and fiscal policy, which are inextricably mixed at all times.
Finally, the discussion of how money is created leads to a different issue, about which I was not laughing but which did leave me scratching my head. A New York Times reporter contacted both Professor Dorf and me a few days ago, because he had come across some of our critiques of the Big Coin option from a number of years back. There, we had argued (separately and together) that one of the most important reasons for a president to resist the gambit is because public psychology about the nature of money is a very fragile thing, and the reliance on a cartoonish, mockable stunt to pay the nation's bills would confuse the public and potentially cause people to lose confidence in the very nature of money.
Exhibit A for that proposition is, in fact, the Post article that I have been deriding here. "What, the government can create money simply by poofing it into existence? Oh my God, what does that even mean?!!" People accept money as money because they know that other people will accept money as money; so even though I happen to know that money is not intrinsically valuable, I live my life as if it is. It is a shared delusion, but believing in it is in no way delusional, because this is how money works.
The fundamental objection that Professor Dorf and I have articulated with regard to the Big Coin trick is thus based on our belief that policymakers must not threaten the social psychology of money. Yes, there are always the Rand Paul types who fetishize gold, and there are people who live off the grid, so we do not need one hundred percent buy-in from the public at large. But precisely because we do not know where the tipping point is -- and because the stakes could not be higher -- no one should even consider messing with people's collective confidence in money.
The reporter for The Times wrote up a very thoughtful piece covering all of this, noting the oddity that proponents of the Big Coin such as Paul Krugman seem to be contradicting their ideological priors: "You might think that the people backing this merry bit of gimmickry
would be the ones casting doubt on the reality of concepts like 'money'
and 'debt,' while opponents would be soberly testifying to the
granite-like substance of those entities."
I oppose the gimmick, and Krugman should, too -- not because we believe in the granite-like substance of money, however, but precisely because all money is and has to be "created out of thin air." People on high-wires should not look down, and the experts should not tell them to do so.
And there is that word: experts. The Times's reporter quotes from a scholar who believes in a fringe school of thought called modern monetary theory (MMT), who suggests that somehow the position that I espouse is elitist:
If the only people who are qualified to have an opinion on monetary issues are people who are on the inside, or in the know, then that’s extremely dangerous for electorally accountable politics. We don’t have to be afraid of pulling back the "Wizard of Oz" curtain and it all collapsing.
I have critiqued MMT elsewhere, but this argument is in a different category of weird. Far from saying that only insiders are qualified to have an opinion on monetary issues, I am saying emphatically that it matters very much what non-insiders think about money. Their opinions matter, because they are part of the social context in which we all must believe that money will continue to be valuable. It is not that they are not allowed on the inside, but there is a genuine worry about what happens when people start to say in large numbers: Wait, if this isn't backed up by anything, what are we doing?
As an analogy, scientists worry when the public at large hears an easily mischaracterized truth, such as the statement that evolution is a theory and that new evidence leads to updates to that theory. The result is that some people say, "Evolution is only a theory! My opinion is just as good." And in my home field of tax law, we cringe when people hear that paying taxes is "voluntary," because that does not mean that taxes are not legally required but only that we rely on people complying voluntarily in the sense of not having to be arrested and prosecuted, which would bring the system crashing down if even a few million people misunderstood the idea, much less tens of millions.
To be very clear, I admit that there are
many accurate ways to describe me as an elitist, but this is most definitely not one of them. If people understand that money is a social contrivance but continue to go along with the group delusion (as I do), great. When too many refuse to go along, however, we are all in danger. It is a terrible idea to taunt everyone by saying: "Hey, guess what? Those politicians in Washington just created a trillion dollars by minting a coin that is not even legal tender!"
Having said all of that, I should note in closing that in my Verdict column earlier this week, I left the door just the tiniest bit ajar by saying that there might come a time when things have become so nutty in this country that the Big Coin play would make sense. That was not, however, in any way an endorsement of the platinum gambit. I was only saying that the world that the 2021 Republican Party is forcing us to inhabit never ceases to become scarier and more bizarre.
I thus cannot predict with confidence that Republicans will never push things to the point where minting a platinum coin -- or giving everyone hot-air balloons, or forcing everyone to say "Merry Christmas" in July -- would end up making sense. After all, we currently have to pay people to become vaccinated against a deadly disease. All bets on rationality are off.