I got into a conversation last night with a man who had a non blank-stare objection to the platinum coin option, namely that he felt this would dangerously undermine congress’ control over spending and the Federal Reserve’s control over the money supply. Neither of these are correct. If anything, under the circumstances the platinum coin is the best option for maintaining both of them.
On Congress it’s extremely important to be clear. No minting of any quantity of coins allows the president to spend even one dollar more than congress has authorized in either mandatory spending or annual discretionary appropriations. Perhaps the best way to think about this is in terms of the late-nineties budget surpluses. When the stock market boomed and productivity surged, federal income tax revenues soared. But that didn’t mean that Bill Clinton obtained a large slush fund that he could spend on what he wanted. If he had an idea for spending, he had to get congress to agree to it. Even at a time of budget surpluses when the debt ceiling was totally irrelevant, congress had full control of the purse strings.
In terms of the money supply there is, similarly, no problem here. Let’s say there’s a $1 trillion gap between what congress has said we should spend and what congress says we should tax. One option is to borrow the $1 trillion. If the Fed thinks that’s put too many bonds into circulation and not enough money, it can print money and use it to buy bonds. Another option is to deposit a $1 trillion coin at the Fed to cover the gap. If the Fed thinks that’s put too much money into circulation and not enough bonds, it can sell bonds and buy money.
Congress still controls spending because only Congress can appropriate funds and amend the Social Security Act. The Fed still controls the money supply because only the Fed can conduct open market operations.
Note too that in political terms there’s less here than meets the eye. A February default crisis would be avoided, and then in March appropriations expire and Obama and Congress will have a big fight over that. Almost everyone will be better off with a “conventional” government shutdown controversy over appropriations than with a high-stakes game of chicken over the debt ceiling. It should be a no-brainer.
