Latest serious idea for fiscal-crisis solution: IOUs

posted at 1:21 pm on January 10, 2013 by Ed Morrissey

Well, thank goodness we’re taking the issue seriously.  It’s difficult to conceive of a sillier proposal than the trillion-dollar platinum coin, but it’s not as if some people aren’t working hard at it.  National Journal reports that a new suggestion involves government scrip — IOUs, in other words:

The $1 trillion platinum coin seems too wacky; the 14th amendment too risky. But could IOU’s be the solution to an impasse on raising the nation’s borrowing limit?

Yes, and President Obama should publicly adopt the idea, Edward Kleinbard, a University of Southern California law professor and former chief of staff to Congress’s Joint Committee on Taxation, argues in a Thursday New York Times op-ed. If lawmakers can’t reach an agreement before the nation hits its debt ceiling–which could happen as soon as next month–then Obama should have a backup plan of issuing IOU’s in place, Kleinbard argues.

“[Obama] should threaten to issue scrip—’registered warrants’—to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.”

Kleinbard is hardly the first to propose the idea. Slate’s Matt Yglesias suggested it in early December. And New York Times Op-Ed columnist and Nobel Prize winner Paul Krugman argued for such IOU’s on Monday, though he called them “Moral Obligation Coupons.” In Krugman and Kleinbard, the idea has found two prominent proponents.

Tagging Yglesias on this might be a little unfair.  He mentioned it as an option in December, but argued that the platinum-coin trick was a better path, which he continued to do on Twitter today:

James Joyner at OTB asked a good question, however:

The IOU approach has more of a precedent, although not necessarily one that commends it.  California began issuing IOUs in 2009 in response to what is really the same problem — politicians not being able to deal with the reality of spending a lot more money than what comes in.  The distribution of the IOUs wasn’t exactly an egalitarian model, either:

People who get California IOUs People California pays in cash
Grants to aged, blind or disabled persons University of California
People needing temporary assistance for basic family needs Public Employees’ Retirement System
People in drug prevention, treatment, and recovery services Legislators, legislative employees, and appointees
Persons with developmental disablities Judges
People in mental health treatment Department of Corrections
Small Business Vendors Health Care Services payments to Institutional Providers

The IOUs stopped when the California legislature passed one of its series of budget compromises that wildly overestimated revenues while increasing spending. Each of the next three years, the state ended up having to revisit the same problem, without addressing the underlying cause — excessive spending and liabilities, especially in its pension obligations.

The argument for IOUs is that people will feel secure in the fact that they’ll eventually get paid.  Well, that may make the people issuing the IOUs feel good, but unless those payments come almost immediately to contractors who receive them, it’s going to be a disaster.  They can’t pay their own vendors or employees in IOUs, and if the debate drags on for any length of time, these contractors may end up closing their doors or furloughing personnel — especially if the distribution resembles California’s.

Maybe we should start addressing the actual problem, which is that the Obama administration is on track to spend a trillion or more dollars more than it receives for the fifth straight year.  We just gave Obama the tax hike he wanted, and which he promised would solve a large part of the problem.  How about working on the spending side now, and eliminate the need for coin tricks or federal scrip?

Addendum: Speaking of coin tricks, Gabriel Malor has a lengthy post at AOSHQ that looks at the legality, constitutionality, and advisability of the option.  Read it all, but here’s his conclusion:

The final question is probably the easiest: no, it’s not a good idea.

Some economists, Paul Krugman foremost among them, insist it will not lead to debilitating inflation because QE 1, 2, and 3 didn’t lead to bad inflation. That’s not so much a guiding economic principle, but an admission that they’re not sure what’s happening, but it hasn’t been that bad yet. But there’s more to consider than just inflation.

Pulling a platinum coin out of thin air is likely to lead to a credit rating downgrade whether we continue to pay our creditors or not because it signals a serious problem with U.S. government finances. It also sets a terrible precedent. And, of course, the very point of the platinum coin trick is to push our day of reckoning further into the future when we’re going to be less likely to deal successfully with our spending problem.

Megan McArdle had a particularly noteworthy rant about the merits of the platinum coin trick yesterday. I encourage you to read it.

In short, the platinum coin trick an unnecessary idea and a bad one, but it is not, as some have argued, unconstitutional or illegal.

These are all reality-avoidance tricks.  Reality will not be evaded that easily.

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