Thursday, October 31, 2013

No, the Federal Debt Doesn't Matter. Really.

If you can only afford the time to pay attention to one blog entry from October, I'd ask that you make it this one, because this stuff is the second most important thing that almost everybody is wrong about.  

This entry is about the public debt and private debt. Most people think they ought to be concerned about how much money the federal government owes and happily borrow themselves into a risky position.  They have both parts dead wrong.

The Treasury tells me that the public debt as of the close of business on October 29, 2013, stands at $17,090,753,527,402.48.  That's $17.09 trillion.  It's a lot of money.  In fact, it's so much money that the wealth of the richest man in the world--Carlos Slim of Mexico,* who made most of his money in a company called América Móvil, is worth about $73 billion--is basically a rounding error.  In other words, if you confiscated Slim's holdings and used them to pay down the debt, the debt would still be $17 trillion.

* - Forbes tells me that Bill Gates recently eclipsed Carlos Slim to regain the title of the richest man in the world, with $72 billion.  I'm too lazy to resolve the discrepancy.  Choose Gates or Slim; I don't care.

It's easy to get lost in the numbers.  It's the same thing that keeps people from understanding astronomical distances. (I mean "astronomical" in the sense of actual astronomy, not in the sense of "outrageously huge.")  For example, Earth is relatively close to Mars in astronomical terms--close enough that we've sent a few rovers there and will probably send a manned mission in my lifetime. It seems close. But on average, Mars is about 225 million kilometers away from us.  Let's say that we send humans to Mars.  Let's think about what a radio conversation with those astronauts would be like.  Radio waves travel at the speed of light, and between here and Mars is mostly a vacuum (it matters; trust me), so words spoken here would travel to Mars at 300,000 kilometers per second (slightly less, actually, but we'll round up).  That's pretty fast, and in fact nothing can travel any faster than that.  So the words "Mars Expedition, Houston here, how are things going?" will get to Mars 12.5 minutes later, and the response, "Houston, Mars Expedition, things are going great," will get back to Earth 12.5 minutes after that.

Can you imagine having a meaningful conversation where every exchange takes a minimum of 25 minutes?  It will be excruciating.

Anyway, back to the public debt.  Yes, it's $17 trillion.  However, the "real" debt is about $12.1 trillion; the rest of the debt, almost $5 trillion, is owed to the government.  (Yes, the government lends itself money. The reasons are complicated.)  It's a lot of money.

But let's set that aside for a moment.

When you and I borrow money, we become obligated to do two things:  (1) to pay interest on the outstanding balance of the loan, at some specified rate, and (2) to pay off the principal, either a little at a time or all at once or some combination of the two.  When I was younger, I thought that borrowing was a really good idea, because it meant I could enjoy things now that I couldn't afford without borrowing, and because I had a relatively high capacity for generating income.

And income is what you need to manage both halves of the borrower's obligation.

In fact, income is really the only significant factor affecting your obligations as a borrower; either you have it (or can get it), or you don't, and no amount of other maneuvering will make your borrowing effective for anything but a short period of time.

Now that I'm older, I realize now that my attitude about borrowing was entirely wrong.  For individuals, borrowing money is a bad idea most of the time.  Borrowing is most wisely confined to two areas of your life.  One is buying a house.  Everyone needs shelter, so unless you can couch-surf with friends for years, you're either going to be renting or buying.  Borrowing to buy a house makes good sense, as long as you can put down a significant down payment and you have the income necessary to make the payments, because presumably that house can be sold later to recoup your money.  That doesn't make renting a bad idea; in fact, it can be a very, very good idea.  But borrowing reasonably to buy a house is a good choice, with the caveats listed above.

The other area where borrowing makes sense is where it is necessary to enable you to earn income.  I think it's not a good idea to borrow money to buy a new car, but if you need transportation so that you can work, it can be a good idea to borrow money to buy a sensible used car--as long as you pay it off as quickly as you can.

That being said, borrowing to go to college is generally a bad idea, at least for an undergraduate degree.  If necessary, get a job and go to community college.  Pay your way.  It may take longer, and you may miss out on the "college experience," but when you graduate, you won't be burdened by a crushing debt.

Borrowing to consume is a horrible idea.  If you can't pay cash to go on vacation, don't go. It's not worth it.  If you can't afford your "dream wedding" without borrowing, there are plenty of ways to get married that cost almost nothing.  I assure you that in 10 years, assuming you're still married, it won't be important. If you're not still married in 10 years, then it definitely won't be important.

A few years ago, Michelle and I decided to stop borrowing money entirely.  We cut up our credit cards and decided to live on what we made.  We downsized our housing situation to cut our monthly expenditure, got rid of cable TV, sold off a lot of the things we'd accumulated over (then) 14 years of marriage, and resolved to live more simply.

The one hesitation I had was in my business travel.  I travel a lot for clients, which means paying for things like hotel rooms, plane tickets, and rental cars.  The last one was the toughest to deal with:  What if I needed to rent a car, and the rental agency wouldn't accept my check card, even though I had plenty of money in the account?

It turns out that it really doesn't matter. I've never once been turned down for a rental because I don't have a credit card.  (And believe me, I rent a lot of cars.)  In fact, nobody asks anymore.  Oh, sure, they'll take an extra $200 authorization, but I can live with that.  After a couple of days, my bank puts the money back in.

Now, I still owe a lot of money, but I'm working on it, and I'm a lot happier because those numbers aren't getting bigger anymore.  Of course, I drive old cars--models from 2004 and 2001--but they're paid for and they get me where I need to go.

So, it might surprise you to hear that my attitude about the federal debt is exactly the opposite.  But it is, and with good reason, which I'll explain.

It's a bad idea for individuals to rack up too much debt, and I'll even add businesses and state and local governments to that list, also.  We all have to live prudently within our means, or we risk some pretty tough situations. But the federal government is a different animal, because the federal government can do one thing that neither you nor I, nor any business, nor any state or local government, can do.

The federal government can create money.

In fact, the federal government does create money.  It created every dollar you have, every dollar in the bank where you keep your savings, and every dollar in every other bank in the U.S.

Remember what I said earlier about income and debt?  "Income is what you need to manage both halves of the borrower's obligation."  To the extent that the federal government borrows money, it has the obligation to pay interest and to return the principal at the end of the term.  The government does earn "income" in various ways--it takes tax revenue, and it receives user fees for everything from patent applications to national park admission fees.  But the federal government has options for managing its borrower's obligation that you don't have.  Rather than earning income to pay principal and interest, the government can simply create money to use to pay those obligations.

For that reason, it really doesn't make a lot of sense to think of the federal government's spending and borrowing in the same way that we think about a family budget.

To understand what I'm talking about, let's consider how the government borrows money.

Let's say the government needs to raise some money.  The way we do that typically is as follows:  The Treasury will offer in bonds in a public auction.  Rather than specifying a fixed rate of interest, the Treasury offers bonds that have a fixed face value payable at a certain time, and they figure the interest based on the difference between what that bond sells for and what it will be worth at redemption.  Let's say there is a bond with a face value of $10,000, payable in five years.  A bidder offers $9000 for that bond.  That means that the bidder will receive $10,000--his principal of $9000 plus $1000 in interest--in five years.  A simple form of calculating the interest would be to take the total interest paid, $1000, and divide it by 5 years, to get $200 per year, on a $9000 principal.  That works out to 2.222% interest per year.  If the next bidder offers $9100, he'll get $900 in interest, or 1.978%.  The next bidder offers $9200, which translates to 1.739% interest.  The higher the bid, the lower the interest rate the government will pay.

Let's say that $9200 was the top bid.  The government gets $9200 today.  In five years, it will have to pay $10,000.  The buyer gets a bond--a piece of paper that he can present to the government in five years and receive $10,000.  The buyer can turn around and sell that bond to someone else if he likes, and that can happen as many times as there are buyers, and it can happen at any point.  Then, when the redemption date comes, whoever holds the bond can redeem it and get the money.

All you have to do is add the appropriate number of zeroes to get to the area where the numbers make sense for governmental operations.

Now, there are two key factors in this transaction.  First, the Constitution requires that the money owed be paid when specified; the validity of that debt, the Fourteenth Amendment says, shall not be questioned.  That's a pretty strong guarantee, because the Constitution is the supreme law of the land--we have no higher law, and most people interpret that part of the Constitution as requiring that current obligations be paid first, before anything else.

The second factor is that there has never been a substantial default on any obligation of the federal government, in more than 200 years of borrowing money.  That was true even before the Fourteenth Amendment was adopted (1868).  (There has been a technical default, once back in the late 1970s, when Congress was late in extending the debt limit and the Treasury simply couldn't physically run the checks necessary to make payments in time, but no one lost any money.)

The truth is that now, even with all the partisan gridlock in Washington, even with our uncertain economic future, even with our deficit spending, our government bonds are considered the safest investment in the world.  People are willing to lend the federal government money for interest rates that approach zero, just to have a safe place to park their money when they're not using it.

These factors would be enough for us to say, "Hey, the debt doesn't really matter all that much," because the "income" needed to service the debt--to pay the ongoing interest--is very, very small by comparison.

(You might be wondering why the government has to pay "ongoing" interest when it only has to pay a fixed amount at the end of the bond term. The government sells bonds every day, and bondholders redeem bonds every day, which means we have to "book" interest every day, even if any particular interest obligation may not be currently due.)

Are you with me so far?  Because here's where it gets (more) interesting.

Imagine that the federal government ran a large bank, and that the government's large bank maintained accounts for every actual bank in the U.S., from Bank of America and Citibank on down to the First Bank of Podunk.  Let's call that large bank a central bank, and the government has its account there.  Each of the constituent banks would also be required to keep money on deposit in an account at the central bank according to a couple of factors: (1) the amount of money on deposit with the constituent bank (and therefore owed to accountholders), and (2) the amount of loans outstanding to borrowers (and therefore owed to the bank by those borrowers).  Whatever that number happened to be, the constituent bank would have to meet it or, if it couldn't, it would have to borrow the money from other banks (who have money to lend), or from the central bank (which is owned by the government).  Because banks have to pay interest out of their own pockets (the profits of the bank) on the money they borrow from other banks or the government, they are hopefully very careful about managing their loan and deposit portfolios. 

That's called a "reserve requirement," and basically it is a requirement that guarantees that banks don't lend out more money than is prudent.  It prevents bank failures and provides stability to the banking system by making sure that depositors' money is available in the event that they need it for something, while providing rules for how the bank lends out the money.

Now, all of this is Banking 101, and it's really not controversial.**  We actually have this kind of system:  It's called the Federal Reserve System ("the Fed"), and it's been operating for about 100 years.

** - Except to people who don't really understand how it works or who believe in conspiracy theories.

Let's think back to the bond sale transaction.  The government has to get $9200 from Charlie Bondbuyer.  So Charlie tells his bank to put that money from his bank into the government's account, and the government sends him a nice piece of paper that says how much money he gets and when.  Then, in five years, Charlie goes to the government, presents the bond, and says, "I'd like my $10,000, please."  The government moves $10,000 from its account into Charlie's account and it rips up the bond.***

*** - Literally.  Or maybe they just stamp it "canceled" like a postage stamp.  It really doesn't matter.

Note, by the way, that during all of the time that Charlie holds the bond, he doesn't have the use of the money.  He can sell the bond, but he might only get what he paid for it, or even less, if market interest rates have gone up.  But it doesn't have to be that way.

Remember what I said about the government creating money?  How does it do that, exactly?  

The Federal Reserve does not have to have money to deposit money into a bank's account.  At its simplest, the dollar has value because the Federal Reserve says it does, and everyone pretty much agrees, because they will accept the dollar as payment for goods and services.  That's called a fiat currency, because we can't call things by English names that describe what they really are.  

We used to be on something called the "gold standard."  Paper dollars had a fixed exchange rate for a particular amount of gold. For a long time in the U.S., the exchange rate was one Troy ounce of gold for $20.67.  In the 1930s, the dollar was devalued, and the exchange rate was changed to $35 per ounce.  In 1976, we removed ourselves from the gold standard entirely, meaning that the price of gold was allowed to float according to market conditions.   

The bottom line is that while the government does have quite a lot of gold at its depositories, that is not the basis for the Federal Reserve's ability to create money.  Today, the Fed creates money by increasing the balance of a bank's account at the Fed--by loaning money to a bank.

Every dollar that exists today was created by virtue of a loan to a bank by the Federal Reserve.†

† - Well, almost, sort of.  Some dollars were created by the U.S. Mint through coinage. But those coins got to the bank because they were purchased using dollars that were created by the Fed.

So, let's go back to our transaction.  Let's say the government needs $9200.  It could go through the hassle and expense of selling a $10,000 bond to Charlie.  Or, it turns out, it could just direct the Federal Reserve to increase the government's account by $9200.  The government could then cut checks out of that account to pay whomever it needed to from that $9200.  It doesn't need to borrow the money from anyone.

Now, I know what you're thinking...if the government just creates money like that in order to spend it, won't that result in inflation?

And the short answer to your question is, yes.

Or you might be thinking...if the government can just create money like that, why have any taxes at all?

And that question is answered by a long discourse on modern monetary theory, which holds essentially that the sole purpose of taxation is to take money out of the money supply.  The short answer, I guess, is that the government could spend only newly created money, but we would still need taxes for their regulatory effect. I think that answer is mostly right, but it's hard even for economists to understand, or at least explain.'s the deal with this approach.

There is an amount of "value" in the world--the value of all goods and services and land and labor--that exists.  That value is very hard to measure because you need a yardstick to measure it. But how long do you make your yardstick?  (Easy: one yard.  But how long is a yard?  Easy:  36 inches.  And how long is an inch?  I can do this all day.)

One way that the dollar is useful is that it provides a unit of measurement.  That way, we know that a Big Mac is worth $3.50 and a Hyundai Sonata is worth $15,000 and a house is worth $247,000.  But the thing that makes those things valuable is their utility.  A Big Mac is worth $3.50 because it satisfies a need or want that corresponds to the amount of labor or capital required to pay for it.

If we added up all of the value in the world and divided it by the number of dollars that were held in private accounts, then we could describe that as a unit that defines what a dollar is worth.  If we increase the number of dollars held in private accounts, then that makes the value of a dollar go down, relative to before.

(We don't need actually to do any of those calculations unless we're trying to measure the worth of a dollar or the size of the economy, because for individuals, a dollar is worth whatever it's worth based on what it can buy in a real transaction.)

Confused?  Here's a simpler example.  Let's say I am running a BINGO game in which there are 1,000 people playing for a pot of $1,000.  After I call 10 numbers, there are five winners.  Each winning card gets $200, because there is $1,000 in the pot and we're dividing it five ways.  Another way of saying that would be that each winning card is worth $200.  We run the game a second time, and this time, there are 10 winners.  Each winning card is now worth only $100, because we have increased the number of winning cards.  Dollars are like winning cards.

Or, here's another example.  I have a chocolate cake to sell, but instead of selling the whole thing to someone, I'm going to sell it in pieces.  The price per piece is $1, but there's a catch:  I will sell as many shares in the cakes as there are people who will buy them.  I will then divide the cake into the appropriate number of pieces and distribute them.  The more people who buy shares, the less each share is worth--and, by extension, the less each dollar is worth.

In the same way, putting more money into private hands reduces the value of each dollar.  Economists call this "increasing the money supply." (It works in reverse, too--taking money out of private hands reduces the money supply.  As I said before, that's what taxes do.)  Managing the money supply is one of the Fed's responsibilities.  The Fed does that through a number of mechanisms, but all of them essentially involve providing incentives for banks to borrow more or less money, depending on what the Fed wants to happen.

Inflation can be a problem.  In fact, it can be a big problem.  Consider Germany after its defeat in World War I.  Germany's entire economic system was destroyed by two factors.  One, virtually its entire means of production was destroyed by the war.  Two, the Allies demanded that Germany pay "war reparations"--payments designed to compensate the Allies for the damage and expense that the war had caused. Before Germany's defeat, it had issued quite a lot of money.  Afterward, because of all of the damage and loss and the uncertain future, the total value of the Germany economy quickly crashed to near zero; divided by all those billions of Deutschmarks, the value of one DM plunged to nearly zero, to the point where paper DM were more valuable to use as fuel or insulation than as money.  That's called hyperinflation.

But right now, inflation just isn't a big problem.  Our economy, though weak, is still huge, in fact bigger than everyone else's.  We aren't in danger of incurring a real loss in a war anytime soon.  We have bountiful natural resources that we could tap if necessary.  And, most importantly, the world puts its confidence in us.

Some economists argue that we need higher inflation to stimulate spending and economic growth.  Others take note of our population growth and argue that we need more money to account for that.  Money is said right now to be too tight--and there are a lot of reasons for that, but interest rates are nearly at zero, and the Federal Reserve can't do much more, if anything, to encourage banks to borrow more than they already are.

By the way, managing inflation is part of the Fed's responsibility, too.  (Unemployment, which is generally seen as the flip side of inflation, is the other thing the Fed is supposed to manage through policy decisions.)

What's really amazing at this point is that despite the government spending about a trillion dollars each year more than it takes in through non-borrowed sources--that's the size of the "budget deficit," the amount of money the government has to borrow to cover its spending--we are essentially in an inflation-free era.  Still.  Large deficits almost always produce inflation, but they're not, not this time.

Now, let's go back to the transaction with Charlie.  Suppose that 5 years ago, Charlie bought a $10,000 bond from the government, and it's now due.  How do we pay for that?  Well, we could pay for it out of tax revenues.  Or we could borrow money from somebody else and pay off Charlie.

Or we could just arrange to credit our own account at the Fed and cut him a check.

And here's where most people get it wrong, and why the federal debt doesn't matter.

A lot of people who worry about the federal debt worry about it because "our children and grandchildren will have to pay this off someday."  It's really scary, because if you divided the debt by the number of Americans, you'd get a large figure...about $55,000 for every man, woman, and child.  And it's scary when you think that if you took everything Carlos Slim owns, it wouldn't make a dent.  In fact, the 400 richest Americans have a collective net worth of about $2 trillion.

That's a lot of money.

But your children and grandchildren don't have to pay a penny of it.  We could deal with it by simply creating money to pay off the bonds as they come due, and they would eventually reach zero.

And for that reason it's genuinely foolish to worry about it.  It just doesn't matter, not in the way that most people think.

That doesn't mean that we shouldn't try to rein in public spending, cut deficits, and pay down the debt through taxation.  But those tools aren't the exclusive mechanisms for dealing with the debt, and it's time to stop treating them as though they are.  And in fact it might be tremendously detrimental to use them.  The reason is that cutting government spending and raising taxes both take money out of private hands.  If we turn around and use that money to pay off bonds, that money comes back into private hands.  But cutting government spending and raising taxes can reduce economic growth, leading to higher unemployment and greater pressure on government spending programs, depending on how those things are used to change the nation's debt position.

One of the biggest problems is that we have huge a trade imbalance--a trade deficit--in that a lot of money is leaving our economy, to China and other places, in exchange for consumable goods.  Once those goods are used up, we don't have them or the money used to buy them.  Growing the economy should involve working to reduce the trade deficit.

We should also work on making our government spending more efficient.  We've all heard stories of $500 hammers.  Making government dollars buy more means that we have fewer of these decisions to make in the long run.

But dealing with the debt isn't pressing, as long as we have the political will to leverage all of our economic tools to manage that debt.  It can be done.

Wednesday, October 23, 2013

Is civility dead?

Since October 1, I've spent a good deal of time on political topics, including the GOP government shutdown and default crisis and the ACA (Obamacare), not just on here but on Facebook as well.

I know that a lot of people don't like talking about politics on Facebook, but I figure that people can easily unfriend or hide me if it bothers them that much, or even send me a private message.  I do try to limit myself, but especially on the ACA stuff, it is important to get accurate information out there.

It would probably not be necessary to do that, except that there is a well funded effort that is determined to sow seeds of opposition to Obamacare by any means, including by outright lying.  There are a lot of people who are frightened to death that Obamacare will succeed.

I have some rules for Facebook political stuff, and really for Facebook in general, that I find tend to make the process go more smoothly.  They are:

  1. When seeking to inform, be informative with accurate information.
  2. Keep your sense of humor. Be funny when you can be, but never let being funny get in the way of being kind.
  3. Treat everyone as your intellectual equal and your social better, even when they aren't.
  4. Never say anything you wouldn't want your mother to read, even if you've fought hard to keep her off Facebook.
  5. Be patient with people who disagree with you, even if they are ill-informed. 
  6. Nobody likes to be told they're wrong, even when the facts show that they're wrong. If you must correct someone, be diplomatic about it, even if you have to insist.
  7. Remember that there are many people who may read your comments, not just the person whom you are addressing directly.
  8. Allow for the possibility that you're wrong and someone else is right. Nobody's right about everything.  Even people who appear to be ill-informed or malicious will occasionally have the right side of things.  Therefore, you must keep an open mind.
  9. Try hard to put yourself in the other person's shoes, both while you are commenting and where that person is likely to be after reading your comment.
  10. Above all, remain civil. If someone insults you, respond with kindness, or at least with disappointment, instead of with insults. Be slow to take offense and quick to apologize.  And remember that the people you are addressing are at least nominally your friends.
I don't always comply fully with these rules, but I do try to, and when I do, the results are better.

Two things prompted me to put this in writing. One was a private note from a friend, sent during a long discussion with another friend about Obamacare, remarking on my apparent patience.  The truth is that even though I might have an impulse to be something other than nice to people and patient with them, even when they disagree with me, I have long believed that being rude to people tends to undermine any chance of winning them over. 

The other thing was a news item in which it was reported, according to Democratic Sen. Dick Durbin, who is the Senate Democratic Whip, that during negotiations over the government shutdown, one of the Republican House leaders who attended those negotiations told President Obama, outright and to his face, that "I cannot even stand to look at you."

It is difficult to imagine saying something that rude to anyone.  (Perhaps to a child whose behavior was extremely disappointing?)

It is simply unfathomable that someone would say that to the President of the United States.

I don't think it is a secret to anyone that I wasn't George W. Bush's biggest fan.  I have never found myself in the same room with Mr. Bush, so I've never had an opportunity to test whether I could be a bigger person than the anonymous Republican House leader was to Obama.  I do have a lot of anger toward him, and, with reason, at least for his first term, I do not believe he was the legitimately elected President.

However, there are no such reasons available to this extremely rude anonymous Republican.  Obama's elections weren't tainted by anything.

But what has become tainted over the last five years is the Republican attitude toward Obama.

They have charged that he was not born in the United States.  He was.

They have charged that he is a secret Muslim. He's not. He professes to be a Christian.

They have charged that he is a Socialist.  He isn't.  He has utterly failed to advocate in any real way for any socialist policy.  Even the ACA is a model capitalist approach to health care financing, and Obama pushed a blue-ribbon commission that recommended that Social Security essentially be gutted in order to "save" it.

They have charged that he was planning to seize guns, to the point at which perhaps millions of fearful gun nuts spent the last five years loading up on weapons and ammunition, to the point where ammunition became so scarce that stores could not keep it in stock.  To date, he has not advocated any serious gun-law reform, and he has not seized anyone's weapons.

Perhaps the most serious, if largely unvoiced, complaint that Republicans have about Obama is that he's black.  They got that one right.  And that one might explain why Republicans like Joe "You Lie!" Wilson, Republican of South Carolina, feels free to scream epithets at the President during the State of the Union Address, or why this anonymous GOP leader could tell Obama that he couldn't even stand to look at him.

What gives these Republicans the self-permission to behave so incivilly?  What cause have they to be so rude, so personal?

Perhaps they believe their own lies.

Perhaps they believe that Obama really is a foreign-born Socialist/Communist/Marxist/Fascist/Hitler Admirer/Muslim who is hell-bent on destroying the Constitution.

Perhaps they believe these things despite all evidence to the contrary.

Perhaps they believe these things despite the fact that no one could simultaneously be all of the things they charge Obama with being--a condition that suggests, at a minimum, that these are just random insults, not informed by any real understanding of what the words mean (other than that they are bad).  They might as well have called him a nose-picker or a pornographer.

Perhaps it doesn't matter.  If they believe their own lies, they don't deserve a place in government because of the mental malfunction required to get to that point.  And if they feel entitled to be rude, they don't deserve a place in government because of the mental malfunction required to generate the narcissism necessary to feel that way.

And that is why they must never be placed in a position of authority, ever again.

Monday, October 21, 2013

Kind of a big "oops"

Last week, the conservative "think" tank Heritage Foundation released a report of a study they had completed about Obamacare and its costs.  If you have been paying attention, you might recognize that yes, this is the same Heritage Foundation that actually designed the reforms that we now call "Obamacare" back in the mid-1990s.  Twenty years on, they recognize that their patrons have goose-stepped considerably toward the right-most extreme, so their past advocacy of these reforms--to borrow a Nixon-era phrase--is "no longer operative."

The thrust of the Heritage report was that among people who use the new health insurance exchanges to purchase their health care coverage, most will pay more than they would than if that Kenyan Communist Fascist Socialist Muslim (black!) Dictator hadn't hypnotized the Congress into passing the ACA in the first place.

And the right-wing echo chamber trumpeted that report up, down, and sideways.  Because of course.

This morning, however--once people had time to read and fully digest the report, and check out its methodology and the assertions of fact on which Heritage relied--it turns out that there was a glaring error in it.

They left out the tax-credit subsidy that will offset a significant portion of the premium cost for people who buy through the exchanges.

Under the ACA, if you purchase health insurance through an exchange, and your adjusted gross income is less than 400% of the federal poverty level for your household size, then you will receive a tax credit that offsets a portion of your premium cost.  The amount of the credit depends on your income; the lower your income, the more you'll get, on a sliding scale.

For the math-impaired, that means that if you make less than four times the poverty level, you'll get some tax credit.

That 400%-of-poverty-level doesn't seem like it would be a lot of money, but it turns out that it is, actually.  For 2013, the poverty level for a family of four is $23,550, so 400% of that is $92,400, just for reference.  Two thirds of all Americans have family-unit income below that line, 400% of the federal poverty level.  In Arkansas, it's three-quarters.  Even in the best-off state, New Hampshire, it's 53%.

When you factor in the subsidy, it turns out that most people who buy through the exchanges will pay less, some drastically less, than without the ACA.

Leaving that factor out wasn't the "oops," though--they did that on purpose.  Heritage claims it was trying to measure insurance companies' pricing activity in the marketplace, not whether the actual cost to consumers would be higher or lower.  It didn't make that clear in the report, however, and that was the "oops."

And it's kind of a big one, because people who are legitimately trying to make health insurance decisions don't care what the "list" price is, any more than they care what the sticker price is on a car they want to buy.  They care what the actual cost is.

I know of one retailer that routinely sells jewelry at 80% or 90% off the "list" price, because of the psychology of the apparent deal.  Never mind that no one actually pays the list price.

It's true that some people will pay more, post-ACA.  That's what happens when fair-market controls are placed on a formerly unfair market.  But the people who will pay more are the younger, healthier people--the ones the insurance company wants to insure.  Those people will still get the benefit of competitive pressure on prices.

* * * * *

Speaking of "oops," there was another one on Fox last week.  (Not just one, but this was a big one.)  Noted college dropout and professional television ideologue Sean Hannity interviewed three couples who were supposedly getting screwed by Obamacare, whose stories "aren't being told by the liberal media." 

A couple from North Carolina claimed that Obamacare has kept them from growing their construction business and forced them to cut hours to keep their employees part-time.  Another couple--where they are from wasn't specified--complained that their insurance company was canceling their current insurance and replacing it with a (presumably more expensive) ACA-compliant plan.  A third couple, from Tennessee, complained that their insurance agent had notified them that their premium would increase by 50-75%.

Now, at this point, I have to interject that if I had something to complain about, I would probably not go on national television to air my complaint.  But if for some reason I decided to do so, I would do two things.  First, I would make sure that I didn't have a better method of getting relief for my complaint.  Second, I would make sure that I had performed at least--at LEAST--a cursory examination of the applicable facts.

Eric Stern, writing for, decided to do a bit of fact-checking, tracking down and interviewing the three couples.  I think you know where this is headed.  After all, it's Fox News ("Relatively Fact-Free Since 1996"), and it's Sean Hannity ("Limbaugh, Minus the Pills and Ex-Wives").

It turns out that the construction business the first couple runs has a grand total of four employees.  The substantive requirements of the ACA start to kick in at 50 employees. The only requirement the ACA has imposed on that couple's business is to inform their four employees that "" exists.  So the ACA has had ZERO impact on this business, except to make it somewhat more likely that if their employees get sick, they will go to the doctor instead of toughing it out until it becomes an emergency.  On a positive note, I can think of four people who today can say "My boss is an idiot" and definitely mean it.

Stern learned in his interview that the second couple's present insurance costs $13,000 a year, carries a $2500 deductible, and doesn't cover one of their children or the woman's unspecified pre-existing condition (although they could spend $7000 more a year for the latter coverage if they chose).  But it turns out that they had not even checked the exchange website to see if they could get coverage for less!  (She heard the website was down, which is a fair complaint, but still.)  I have not decided whether I am surprised or not surprised, but my eye-rolling muscles were fully engaged when I learned about that fact.

Stern did the shopping for them, using the figures they'd provided, and even without a subsidy, they could buy a plan through the exchange that would cover all four family members and the wife's pre-existing condition, with the same deductible.   The cost?  $6,700 a year, just over half what they currently pay.

And the third couple?  They pay about $10,000 a year for insurance and expect it to go to $15,000 to $17,500, according to their insurance agent.*  What about the exchange price?  Don't know, don't care, hate Obama, won't look.  But Stern looked...$3,700 a year, without any subsidies and the same coverage.

* - This is not the first instance I've heard of insurance agents talking up how expensive the health insurance plans are about to become.  Makes me wonder if there isn't a bit of fearmongering going on among those people, in part because they make a good commission on insurance plans they sell directly but make nothing if their customers go to the exchange.

So Hannity's batting average is way worse than even Dan Uggla's.**  But, then again, you already knew that.

** - Dan Uggla was paid $13.1 million by the Atlanta Braves this year to hit .179, nearly 30 points lower than the next-lowest position player with at least 502 plate appearances. He collected $164,336.78 in salary for each of his 80 hits. Miguel Cabrera, who led the Majors this year, collected $108,808.29 for each of his 193 hits.

If you have a principled objection to Obamacare, I suppose it's OK for you to follow your heart and spend money you don't have to spend just to make a point.  (Actually, when people spend more than they have to spend for coverage, that is a form of subsidy for the rest of us, which makes it even more likely that the ACA will succeed.  Chew on that for a bit.)  The problem is when your principled (or unprincipled) objection to Obamacare leads you to unprincipled actions, like lying to people about its impact on you, or sticking your fingers in your ears and yelling "la, la, la" at the top of your lungs rather than hearing that the facts are other than what you've been told or what you assumed they would be.  Worse still is a deliberate, calculated effort to mislead people in order to stir up anger against the President.

(This whole thing reminds me of the conservative rationale for eliminating the estate tax--the family farm that was lost because the patriarch died and they couldn't pay the estate taxes without selling the farm.  Trouble is, they couldn't find anyone that had actually happened to.)  

I have long held that it is perfectly fine for anyone to hold an opinion I disagree with.  All I ask is that people inform themselves as best they can, with real information from real sources, analyzed critically.  Because, really, if you're not doing that, what does it matter what you think?

Friday, October 18, 2013

How beauteous mankind is

O wonder!
How many goodly creatures are there here!
How beauteous mankind is! O brave new world,
That has such people in't.

-- William Shakespeare, The Tempest

* * * * * 

A remarkable thing happened this week.

On Wednesday in Albuquerque, New Mexico:  Tippi McCullough, a teacher in Little Rock, married Barb Mariani, a prosecuting attorney.  As you can guess from the names, Tippi and Barb are both women, and they were partners for 14 years before tying the knot.

I presume--I don't know them, and haven't spoken with them--that they went to New Mexico to marry because it is legal to do so there and it is not in Arkansas, and not because it is a beautiful place to get married (it is beautiful) or because they are fans of Breaking Bad or that show about witness protection...In Plain Sight.

Of course, none of the above facts are particularly remarkable any more.  Same-sex marriage has been around for a while, de jure for a few years and de facto for a lot longer than that.  What is remarkable is that Tippi McCullough teaches English at Mount St. Mary Academy, a girls-only Catholic school.

And what is sadly unsurprising is that she was fired on Thursday.

Today's entry is not really about the legal aspects of what happened.  I'll say now that legally the school's decision to fire this teacher is almost certainly OK.  There is no Arkansas or federal law barring discrimination in employment on the basis of sexual orientation, and I have to think that if one were to be passed it would almost certainly carve out an exception for religious institutions, which MSM is.

And it's not really my place to tell the Catholic Church what its doctrine is or should be, or how they should deign to follow whatever it might be.  Our disagreements are too primary for that.

And really, the Catholic Church can be as hypocritical and unfair as it wants to be, and it has demonstrated singular excellence at both of those for a long time.

But--and there is always a "but," because without it this would be an even more boring blog--it is certainly my place, when the Church gets out of line, to say so.  If the Church and the Catholics who make it up want a place in our politics, then they are going to have to submit to some criticism from those of us who see this as massively hypocritical and massively unfair.

My understanding, based on reports, is that the school was aware of Tippi McCullough's sexual orientation and the fact that she was in a long-term homosexual relationship, and it had no problem with her teaching there.  Perhaps there were ground rules, perhaps not...I can't imagine a teacher's sexual preferences and activities ever being the proper topic of classroom discussion, so I would expect that she would no more need to be told to keep her private life private than would any other teacher, straight or gay.

I'm sure Tippi McCullough is just as excellent an English teacher (29 years under her belt, 15 at the school) as she ever was.
So, what's changed?  She's entered into a more committed form of the same relationship she's already been in for 14 years.  It's still not a relationship that the Church recognizes as valid.  Her marriage is regarded by the Church as a nullity--it never happened.

I believe, although it has never occurred to me until now to inquire, because who cares?, that the Church regards my (heterosexual, long-term, but not solemnized in a Catholic Church) marriage as a nullity.

I have to think that if Tippi McCullough had gone down to the clerk's office and married Bob Mariani instead, in a ceremony that the Catholic Church would not regard as a marriage, then she would still be employed.

And the Church has proven that if there are reports that Father McTouchyfeely has been taking indecent liberties with the plaid-skirted schoolgirls--something far more horrible, even in the fevered imaginations of the repressed prudes that run things, than a woman marrying a woman--he just gets reassigned.  (Sorry if that offends my Catholic friends, but the history of that is indisputable.)

For her part, in a response to a letter of protest from outside the MSM community, MSM principal Diane Wolfe wrote, in part, that "would be instructed and bound to do the same action were documentation provided to me that an employee of a Catholic school divorced and remarried without an annulment or if an employee had a side line business of performing abortions."  She also claimed that what changed was that a "public document was generated," proving a violation of the morals clause of the contract.  "Do you not think," she wrote, that "it took moral courage to carry out and uphold the tenets of the church and the directives of those responsible for giving oversight to those tenets?"

O brave new world, that has such people in't, indeed.  Moral courage?

If that is truly what animated this decision, then the inescapable conclusion is that the Church is crying out against our cultural sea change, hoping to shove gays back in the closet.  It would rather not have LGBT teachers, of course, but if it is going to have them, could they at least keep quiet about it, and not make too big a fuss?

The problem with that, of course, is that it is a failure of the Good Shepherd to attend to the needs of the sheep, to borrow a metaphor.  Putting gays in a closet is inherently damaging.  That's not an act of moral courage, no matter how carefully you apply the gloss.

I am told that Tippi McCullough was a "beloved" teacher.  For many young women, the teen years can be lonely and isolating, a time of repression and regression.  Those are the years when girls' achievement falls behind boys', for reasons that are not yet fully understood.  I wonder if what made Tippi McCullough a "beloved" teacher was the kind of perspective and identification and respect that an outsider, who nevertheless overcomes and achieves, brings.  Every school could use more of that.

Wednesday, October 16, 2013

Crisis averted? With a sop to the new Puritans

Reports out of Washington indicate that a deal has been reached whereby the GOP has agreed to release its hostages and avoid destroying the country because they hate President Obama more than they love America.

Until the bill is passed, hold all celebrations.

But apparently the deal will reopen the government at least through January 15 and raise the debt limit to cover at least through February 7.  Out of all of the laundry list of demands the hostage-takers had made, only one is being granted.  Apparently the subsidies provided in the ACA will be subject to "enhanced" income verification.

I have absolutely no idea what that means.  The "subsidies" provided in the ACA, which are actually tax credits, were already subject to income verification.  On top of that, the way that these tax credits were already going to get sorted out is through your federal income tax return, which is pretty much the best way we have to verify a person's income.

It bears repeating that the subsidies in the ACA are TAX CREDITS.  Somehow, the Democrats managed to find a tax cut that the GOP doesn't like.

This maneuver, like many before it emanating from the Republicans, is yet another example of the new Puritanism that has invaded our way of thinking.

Have you heard this complaint?  "I was in the grocery store, and the person ahead of me was obviously using EBT, and do you know what they bought?  [insert some "luxury" food here] I wish I could be lazy and on welfare and lie around eating like that all day."  That complaint is often directed at the acts of a racial minority, or at least a noted poor person, and often accompanies comments about the number of children, marriages, divorces, or dogs that person has had.  "My taxes would be a lot lower if those people would work/have fewer kids/get rid of their dogs," the lament continues.

I find it remarkable, the number of people who are most animated in their political views by a desire to make absolutely certain that people don't get some undeserved benefit, to the point at which they will actively deprive people who probably do deserve that benefit on the chance that they might not.

I see it repeated, again and again, dozens of times.  I see people who want to drug-test welfare recipients.  Never mind that the rate of drug use among welfare recipients is far lower than the general population; never mind that most beneficiaries of welfare are children; never mind that it costs more to drug-test welfare recipients than we will ever save by denying welfare to people who test positive for drugs.

I see people who want to prevent insurance companies from paying for birth control pills. "I shouldn't have to pay for other people to have sex." Indeed not, not when you obviously aren't getting any yourself.

I see people who want to prevent same-sex couples from getting married, because even though doing so will have NOTHING whatsoever to do with that person's own marriage, it offends their religious sensibilities and therefore must be stopped.

And now we see people for whom the most urgent national priority is making sure that the people who get a tax-credit subsidy for their health insurance actually deserve it, to the penny.

Maybe you do see somebody ahead of you in line at the grocery store, who's on public assistance.  Maybe they do have three or four kids.  And maybe they are buying a steak and a bottle of wine.  But maybe the steak is from the "reduced" rack, the wine is a $4 screw-top, and they are celebrating an anniversary by trying to hold onto just a little bit of their humanity in a tough time.

The world would be better off if we would all tend our own gardens just a little more, and have a little more faith in our fellow human beings.  It costs nothing of value to do that, but a little piece of you dies when you don't.  There will always be people who game the system, but almost everybody who receives the meager public assistance that's available gets it because it's their last hope. 

But so it goes with Obamacare.  It will now be a little bit more of a hassle to get your tax credit, in an as-yet-determined way, that increases the cost of the program for virtually no marginal benefit, but damn, if we didn't keep Joe Q. Undeserving from getting a couple of extra dollars off his health insurance premium that he'd have to pay back next year anyway.

And for that the Republicans shut the government down for 16 days and drove us to the brink of a debt default?

Was it worth it?

Tuesday, October 15, 2013

American Somalia

The new film Captain Phillips tells the amazing, true-life story of the hijacking of the cargo ship Maersk Alabama and the kidnapping of its captain in 2009.  If you watch the news, you are probably already aware of the general story:  Somali pirates take the ship, then, when things don't go as they plan, they take the captain hostage aboard a lifeboat.  Navy SEALs kill the pirates and rescue the captain.

If you're like me, you might wonder how it is that pirates capable of hijacking a huge cargo ship could be permitted to operate in the first place.  And it turns out that the main reason why violent ocean criminals could operate with relative impunity around the Horn of Africa is that there was, at that time, no functional government in Somalia.  (It remains to be seen whether the new central Somali government will be successful.)

Between 1991, when the central government collapsed and Somalia fell into civil war, and 2012, when a new central government took power, Somalia was an anarchist paradise.  One might even call it a Republican paradise in some sense.  It's not that there was no government in Somalia.  But what government there was, was organized at the local level.  There was no national law.  Dispute resolution became a matter of local custom rather than objective standards.  There was no protection of rights of any sort, other than that which might be protected through force, because there was no power behind the forces of justice.

And without anyone minding the store, piracy flourished, as it always flourishes in the absence of law, because piracy is about taking what a person can get, through whatever means, licit or illicit, regardless of the harm.  Somali pirates had what all successful pirates need, a place to land, because no pirate ship can sail the seas forever.  You need fuel and food and water and rest.

Here we are, two weeks into the shutdown of the federal government.  If you're a federal employee, furloughed or not, you've seen the consequences of that shutdown--you're either doing the work of several people and not getting paid for it, or you're sitting home and not getting paid, either.

But the federal shutdown has wider-ranging consequences than that.  For example, the Centers for Disease Control have furloughed 8,000 of their 12,000 workers, so the kind of monitoring we desperately need to detect and prevent outbreaks of disease has been compromised, if not eliminated outright.  The Consumer Product Safety Commission is shut down, so toys and other products that enter this country are not being inspected for lead, flammability, choking hazard, and the like.  Scientific researchers who study migratory birds, climate change in Antarctica, and other seasonally affected topics are going to lose a year of study data--and maybe destroy decades of research in the process.

These are but a few of the thousands of consequences.  And it's about to get worse.

The federal government is shut down because Congress has not made appropriations to authorize the spending of money.  There is an old law on the books, the Anti-Deficiency Act, that prohibits--under criminal penalties--the spending of government money without appropriations, except where necessary to prevent danger to life or property.  So some operations continue, like TSA security screenings at airports, and the government's debts continue to be paid, and the government is able to spend money on those things because there is money in the Treasury to spend.  The reason why there is money to spend is because taxes keep rolling in and because the Treasury can continue to borrow money to cover any deficit between tax revenues and expenditures.

And the reason why it hasn't been an utter catastrophe is because of hundreds of thousands of dedicated federal employees who believe in their mission and are serving their country in a way that ensures mission success and continuity over everything, even at great personal cost.

That's about to change.

On Thursday, the federal government will reach the debt limit, at which point the Treasury will be prohibited by law from borrowing any more money.  At that point, the amount of money available to spend will be limited to daily tax revenues.

The problem with that is the order of priority.  The Constitution requires that the federal government's debts be paid.  There is no getting around that problem.  There is enough money coming in from daily tax receipts to cover the "debt service"--the amount of money required to pay the interest on existing federal obligations as that interest comes due.

But there is more to dealing with debt than just paying the interest as it comes due.  Every day, there are government obligations that mature--in other words, that must be paid off, principal included, if demanded by the debtholder.  For example, in September, the federal government received about $230 billion in tax revenue and borrowed about $751 billion, but $748 billion of that was used to pay mature principal and interest obligations--just rolling over the debt to be paid later.

So it's not enough to have enough to pay the interest.  We also have to have enough working room, without borrowing even one penny more, to pay off the principal we owe before it can be re-borrowed.  That's an extraordinarily difficult task.

And there just isn't enough money to do that AND to spend on governmental operations.

Even where necessary to protect human life or property--to do things like monitoring climate change and disease outbreaks and food safety and toy safety.

And killing pirates on the open seas.

What we are looking at is the collapse of the federal government.  Some of you might think that's a good thing, but you're kidding yourselves.  Just look at what happened in Africa.  It can happen here:  an American Somalia, brought to you by the people who say the less federal government, the better.  The GOP.  And specifically the Tea Party radicals who run the GOP these days.

And people like Sen. Ted Cruz and Rep. Ted Yoho, and failed half-term governor Sarah Palin, and dozens of other members of the GOP, are pushing for this to happen.  "It won't be that bad," they say.  "Trust us, Obama's just fear-mongering."

This is nothing less than the overthrow of the federal government.  There were times when advocating for it would land a person in jail.  Instead, these people get airtime on talk shows and the loving support of millions of misguided, ignorant, or malicious Americans who have no idea how important the continuity of the federal government is to their daily lives.

The Republicans have about a day and a half to come to their senses.  I'm not holding my breath.

* * * * *


As I've said before, there are three solutions.

One, the Congress can extend or repeal the debt limit--an outright repeal would be preferable, in my view.

Two, the President can decide that the Fourteenth Amendment and the Supremacy Clause mean what they say and order the Treasury Secretary to sell bonds in excess of the statutory debt limit.

Three, the President can order the Treasury Secretary to mint one or more platinum coins, of face value far in excess of their melt value, and use the proceeds to pay the government's debt and operational obligations.

Of these, the first is the most preferable.  The third is next, because it is statutorily authorized, completely and unquestionably constitutional, and sound from a monetary standpoint.  But we are in an emergency situation, and quickly running out of better options, so the second option might have to be it.

Of sweet onions and getting older

This morning, in the onion fields around McAllen, Texas, workers began the task of planting the finest variety of onions ever engineered, the Texas 1015 SuperSweet.  The 1015 is known for its exceptionally low sulfur content, which translates into a wonderful sweetness that provides true onion flavor to a variety of savory dishes without the harsh, bitter tang for which inferior onions are so well known.

Agricultural researchers from Texas A&M University spent more than a million dollars developing the 1015.  The fruit of their research might well be the finest thing ever to come out of Texas A&M, and maybe Texas as a whole.  First grown commercially in 1983, the 1015 has become a popular choice for chefs and home cooks who know better.  In absolute terms, in the universe of all things, it is not much to look at.  It's still an onion, after all.  But as onions go, it's a sexy one.  Its easily peeled, yellowish skin gives way to a bright white, fleshy interior, sweet enough to be eaten like an apple, though I don't recommend it.  When sauteed, it develops a deep, rich caramel flavor suitable for the finest French onion soup, but it excels at both high-brow and low-brow applications.  With a high rate of reliability, the 1015 grows in the optimum onion shape, the oblate spheroid--somewhat like a sphere that has been flattened a bit.  In virtually every perceivable way, the 1015 blows the doors off the better-known Vidalia.

The 1015 gets its name from the day on which it is optimally planted, October 15.  (I guess when you spend a million dollars on an onion, you get all the details right.)  For that reason, for as long as I've known about them, I have felt a connection to the 1015.  I'm a 1015, too--10/15/1975, to be exact.  And when they mature and come into the marketplace in early spring, I feel my connection to them deeply.  I can pick one up and say, "Hey, I know when and where you started," and know that we were destined for this moment.

It might seem silly to devote so much energy to something so mundane as an onion.  As I get older, I realize, though, that one of the secrets to a life of happiness is in finding joy in the mundane, everyday things.  We can all get excited about a special trip to an exotic locale, or that first in-person glimpse of that famous monument, or those $500 shoes.  It takes the wisdom and modified perspective of older age to recognize that life is relatively empty of those Super Bowl moments, but full of little remarkable things that don't seem so remarkable at first glance--stepping back to admire a freshly mowed lawn, or hearing your child read aloud on his own for the first time, or chopping up an onion that was planted on your birthday.

Monday, October 7, 2013

The bigger fight looming

The House GOP (motto:  "less popular than herpes") is now a full week into its latest round of hostage-taking brinksmanship, and people are starting to figure out that the government is kind of like lawyers:  Everybody hates lawyers, until they need one.  And it doesn't look like they are going to end it anytime soon, for three reasons:

1) They refuse to admit that they will not get what they claim they want--the repeal of the ACA.
2) They know they want to get something out of this thing that's been so politically expensive, they just don't know what.
3) Until they can reach a deal that allows them to declare victory, they aren't going to do anything.

So, when you get down to it, the thing that's most keeping the government shut down at the moment is pride.

It may take some time for the suffering to reach the opinion makers, but it will get there eventually.

The problem, however, is that as bad as it is for the government to shut down, it would have to be shut down for a long time for it to have an irrecoverable impact.

Fortunately for the House Republicans, there is a much better hostage looming.

About 10 days from today, give or take, the federal government will reach the debt limit, at which point it will be--at least according to the law--legally unable to borrow money.

Now, there are a lot of reasons why it's really insane to have a debt limit in the first place--only we and Denmark have a debt ceiling, and Denmark's is roughly three times the amount of its outstanding debt--but those are the conditions under which we operate.

The consequences of hitting the debt limit are dire.  Right now, despite all of our economic problems and gridlocked government, U.S. Treasury securities are still considered the safest investment in the world, "risk-free" in terms of credit risk.  For that reason, we get, from the open market, the lowest interest rates of anyone who borrows money (which is everybody, more or less).

A substantial part of the reason for that is that in over 200 years of borrowing money, the federal government's obligations have always, ALWAYS, been paid on time and in full, as agreed.

If something happens to call into question our ability to repay the obligations we've incurred, interest rates will go up because of the perception of risk.  Treasuries will no longer be considered to be a risk-free investment.  We will be more at the mercy of our creditors than we are today.

Our credit rating is not a position we should gamble with or surrender lightly.

Yet there is a core of about 40-50 Tea Party-affiliated radicals in the House GOP caucus who are aiming to do just that.  They don't care about the consequences (or they don't believe there will be any).  They are in the process of taking our good credit hostage so that they can extract from us that which they could not fairly win at the ballot box.  It's despicable.

It's also utterly unnecessary.

To understand why, and why having a debt ceiling in the first place is foolish, it's necessary to understand a few things about money and how it gets created.

As I'm sure you understand, the federal government has created all of the dollars that exist in the world.  A very small percentage of that money exists in the form of coins that are in circulation.  A somewhat larger percentage of that money exists in paper bills--$1, $2, $5, $10, $20, $50, and $100--that are also in circulation.  But the vast majority of the dollars that exist in the world exist as credits on electronic bank ledgers.  Those credits have absolutely zero physical existence in the world.  They are just abstract numbers.

The government creates money by loaning money to banks, other financial institutions, and--as it turns out--to the government itself.  The Federal Reserve, which maintains the master electronic bank ledger that keeps track of who has what money, loans money by increasing a particular institution's credit balance on those ledgers. 

(You've heard about the Federal Reserve setting or adjusting interest rates from time to time.  One of the rates the Federal Reserve sets is the rate that banks get charged for borrowing money from the Federal Reserve (the "discount rate").) 

When the Federal Reserve loans money, all it has to do is hit a few keys on a keyboard, increasing the borrower's credit balance on the ledger.  That money is created from thin air.  And when the money is paid back, the process is reversed and the money is destroyed.

As I noted above, the Federal Reserve keeps track of the government's balances, also.  The government gets money from a lot of sources--tax deposits, user fees, tariffs, loan payments, bond sales--and all of that money gets deposited into the Treasury and ultimately ends up as a number at the Federal Reserve.  The Fed can also loan money to the government, directly or indirectly, by buying government securities.  In fact, the Fed currently owns about $1.6 trillion in Treasury securities.

Now, I mentioned earlier that the federal government issues coins.  Suppose you owed $100 in taxes, and in order to pay those taxes, you went down to the IRS office and handed them 100 dollar coins.  Those coins were issued by the Treasury without the Fed's involvement.  What happens to those coins after you hand them over to the clerk?  Most likely, they would get deposited into a bank for credit to the government's ledger at the Fed in a complicated series of transactions involving the bank's reserve requirements.  But let's simplify the process a bit and pretend that the clerk simply walks those coins down to the Fed and deposits them there.  The Fed would put them in a vault and issue an electronic credit to the government for $100.  The Fed could sell the coins, or it could send them out as part of a loan.  But they're going to have a value of $100 in the aggregate, and the Fed is legally obligated to accept them for deposit and credit them at face value.

Here is where things get a bit interesting.  It doesn't cost the Treasury $1 to make a $1 coin.  In fact, it costs about 30 cents.  The difference in price is called "seigniorage," and it refers to the difference between the cost to produce physical money and the value that money has as legal tender.

And it turns out that those Federal Reserve Notes that are stuffed into your wallet--the dollar bills, tens, and twenties--those have a kind of seigniorage, too.  They cost about 5 cents to produce but are worth their face value in anyone's hands. 

You might be wondering, what does this have to do with the debt?  Pay close attention.

What gives a $1 coin its $1 value?  The fact that the Treasury says it's worth $1.  That, and that alone.  The metals inside are basically worthless.  The coins aren't rare.  A dollar coin has a dollar's value because the Treasury says it does.

So, what's to stop the Treasury from minting a few trillion of these coins, depositing them in the Fed and getting a credit on the balance sheet?  Debt crisis solved, right?

Legally, the answer is, nothing is stopping that from happening, except as I'll discuss below.  What stops it from happening as a practical matter is that there probably isn't enough copper, manganese, nickel, and zinc to make the trillions of coins necessary to have an impact--plus, a return of 70 cents on the dollar probably isn't enough to justify it.

But if the Federal Reserve can create money out of thin air and electrons, and if the Treasury can create money that has more value than the value of its components, why should we have a debt ceiling at all? 

After all, the government can't spend money that isn't authorized by Congress through appropriations.

The debt ceiling only exists as a political tool to constrain Congress's ability to spend.  It is an entirely arbitrary limit on the aggregate debt of the country.

It makes sense for individuals to have spending limits and credit limits.  We can't create money.

But the government can.

It turns out, there is a perfectly reasonable way to resolve this debt crisis, in a way that carries no risks and ensures that the validity of the public debt is not questioned.

The Constitution gives to Congress the authority to determine what money will be coined.  But it's more convenient for the executive branch to deal with the specifics, so Congress has simply passed a few laws giving the Secretary of the Treasury the authority to carry out the coinage processes.  Congress has put a lot of limits on those processes, in terms of which coins will be issued, and how many, and at what denominations and compositions.

But it has also authorized one particular type of coin to be minted and entirely delegated the authority over the face value and number of coins.  The Treasury can mint a platinum coin in any denomination it chooses.  Doing so is a matter of unquestioned legality.

There is literally nothing stopping the Secretary of the Treasury from minting a platinum coin with a value of $1 trillion, or $5 trillion, and depositing that coin with the Federal Reserve.  As noted above, it would only take probably a few hundred dollars' worth of platinum to do it.  (Platinum is trading at about $1400 an ounce right now.)  As noted above, the Fed would be obligated to accept it.

Indeed, we could pay off the entire debt in that way, if we liked.

Remember, the government creates the money. 

There are some practical reasons not to do this except in the most dire of emergencies--when, for example, the government is being held hostage by a group of people who hate the government and the President and are bent on doing harm to both, regardless of the consequences.  Excessive activity of this type could lead to inflation, which is problematic mostly because it would make borrowing more expensive.  That's functionally the same as a default without the stigma of a default.

But if a hostage is taken, and ransom demanded, getting more time to protect and rescue the hostage is imperative.  This arrangement could defer the crisis for a long time, maybe months, at least until there has been an intervening election and the idiots that are doing this to us can be voted out.

Mint the coin.

Tuesday, October 1, 2013


Many years ago, when I was living in Pine Bluff, I lived across the street from a fellow that some of you may have heard of.  He was a preacher with a pretty large congregation and a television ministry, which was something of a novelty in those days.  I won't say he was all that well liked in the neighborhood, and I have some stories I could tell--but I won't, not today, because they aren't the focus of this post and would just distract you from my point.

Back then, he was a young man on the make, with big aspirations that would lead him to a much bigger church in another city, then into politics, and finally into media and punditry, where he sits today. I am nearly certain that this was all part of his plan, even back in those days, although his plan probably ended with him residing at 1600 Pennsylvania Avenue for a couple of terms.

Mike Huckabee is well known to most Arkansans as a former governor, and he's fairly well known outside this state because of his presidential campaign and his position as a contributor and host on Fox News.  I don't pretend to know him any better than anyone else, but I did know him before he was famous.

I was interested in something he said today about the government shutdown.  Huckabee is, of course, a Republican.  And he's a pretty smart guy politically, even though he sometimes gets the party-line stuff wrong.  He does think that the ACA will be an unmitigated disaster for the country, which is at least nominally the GOP line (albeit the same line they gave about Social Security and Medicare, which turned out to be spectacularly wrong).  But he made an interesting point today:

The Republicans need to stop fighting among themselves about who dislikes Obamacare the most. Every single Republican in both the House and Senate voted against it. Every one. Not one Republican is on the hook for Obamacare. The Democrats own it--totally and completely. And if the Republicans in the House and Senate feel as I do that it really is a job-killing, economy-busting disaster that will increase costs, raise taxes, limit medical choices, and leave people in the lurches, then I want to suggest a way to fight it more effectively. ... Give the Democrats what they want for one year. Make it clear to the American public that it belongs to the Democrats. If it works like President Obama, Harry Reid, Hillary and Nancy Pelosi claim, then America will be better off and I will take to any platform or stage to apologize and acknowledge they were right and we were wrong. 
Now, I'm usually the last person to agree with Huckabee on anything, but even I have to admit that he is quite a bit more sincere about things that most politicians of both parties.  True, the full proposal he makes is more than a little misinformed about what Obamacare does,* but he's onto something with the central point.  If Obamacare is going to be the disaster the GOP claims it will be, why wouldn't they let it happen, eager as all-get-out to see the Democrats fall flat?

* - For example, he says that everyone should be subject to Obamacare's provisions, with no exemptions or delays, "not members of Congress or their staff."  This is a popular talking point, but it's just ridiculous.  There is no "Obamacare plan" that anyone has to purchase, or even can purchase.  If you have employer-based health coverage--which describes all of the federal government's employees, up to and including the President--then you keep it.  The federal plans have to meet the minimum requirements of the ACA, just like any other health plan.  If you don't have coverage from your employer, you can buy a private insurance policy through an exchange, or you can buy a private insurance policy directly from the company, or if you meet age or income requirements, you're covered by Medicare and/or Medicaid.  Or you can pay a penalty for not having coverage.  The law already provides that nobody's exempt.

"But, wait a minute, Jim," I can hear you thinking.  "Aren't the Republicans just doing everything they can to prevent this disaster from happening, out of genuine concern for the protection of the American people?  Isn't it possible that they view this as something that will wreck the economy, and are doing what they can to stop that from happening?"

And I might be willing to concede the point, but for a tiny problem:  The GOP is causing the government to shut down--which nearly everyone agrees is currently and will in the future be horrible for the economy--and is threatening a default on the national debt, which is such a horrible thing to have happen that the Constitution itself forbids it and will almost certainly cause lasting, maybe irreparable damage.  They are willing to cause actual harm and real suffering, all to prevent the potential harm that Obamacare might eventually cause.

That tells me that this is no principled stand for the American people.

Republicans have never been very good at governing--and, really, how can you expect a government to do anything right when it's run by people who believe government can't do anything right?--but they have always been excellent at politics.  That requires a deep understanding of how to read public opinion.  If you read only the headlines about public opinion of Obamacare, you'll see that a pretty strong majority (I've seen 57%) oppose it.  But if you delve deeper into those polls, and you look at specific provisions of the law--you know, the actual things that the law does, and not just the generic "Obamacare" banner--then you find that wide, wide majorities of people actually support the individual provisions of the law.

That dichotomy is not lost on the Republicans.  They've done a really good job of raising doubts about the plan--the wholly fictitious "death panels" ruse comes to mind--and tagging it with the Obamacare label to tap into some pretty deep hatred that many people have for the President.  But now that it's starting to get implemented, and the big features we've been waiting on are almost here, they realize that messaging on this subject isn't going to be enough.  It turns out, people actually like to be able to buy insurance for reasonable rates.  They like being able to go to the doctor when they're sick--or when their kids are.  They like being able to change jobs without worrying about whether they can get health insurance.  They like that their health insurance is covering them at least 10 ways, for all the things that could go wrong.  And while they may not like having to buy insurance or pay a penalty, they realize that penalty is going to hit so few people that it's almost not even worth talking about.

So, if you were faced with a program that was passed entirely by the other side, with no Republican votes, that makes a bunch of changes that most people, on balance, are going to like, and that was moving forward despite more than three years of you trying to undermine it, what would you do?

Do you really think you wouldn't fight it tooth and nail, to the last man, doing as much damage as you could to prevent it?

Or, if you genuinely thought this program was going to be a disaster that you could tag the other side with, in a way that would lead to electoral landslides for you and your party on the basis of your opposition, what would you do?

Do you really think you wouldn't welcome that scenario with open arms?

In politics, there are so few moments of genuine clarity.  But this is one of them.

And if it takes a government shutdown for people to see exactly what the GOP's gambit is, that's unfortunate.  But if I were Barack Obama and Harry Reid, I wouldn't give an inch, not one inch, no matter how long it takes.  We will survive, and as long as we don't give in to the GOP's thuggery, their destructive, selfish, cynical ideals will be gone for a long time.

It's time for the GOP's Elijah moment.  It's time, as Huckabee says, for the GOP to have the courage of its convictions.  If Obamacare is going to be so bad for us, let us have it.  If they're right, they win forever.