Economic Populist

Economic Populist: The Gerrymander & Wave Election Floodplains

Last week (8 Oct), Sam Wang at the Princeton Election Consortium Blog reported on some interesting findings on partisan swings in gerrymandered Republican districts:

Representatives who benefited from the great partisan gerrymander of 2010 were given enough of an advantage to get into office narrowly. In a district designed to give Republicans a narrow advantage, Republican loyalists are likely to be spread thinly, with the balance of the needed votes being drawn from independents. Some of these independents might be more prone to anger about the current situation. These polls suggest that Republicans in those states might be particularly ripe targets for pressure.

 
The 12 districts plotted in white are FL-02, FL-10, FL-13, MI-01, MI-07, MI-11, OH-06, OH-14, PA-07, PA-08, VA-02, and WI-07.

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Economic Populist: Nuts & Bolts for Premium Notes

I recently discussed an alternative to Consol Bonds

Now, I was addressing a proposal by Matt Lavine at Bloomberg, and as a result, the explanation was not necessarily the simplest possible explanation. So here, I'm looking at just my proposed 10 year 100% coupon note, and going through the nuts and bolts.

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Economic Populist: Premium Bonds Would Disarm Default Threat

Just as the GOP Shutdown was getting underway, 2 October, Matt Levine at Bloomberg was calling on the administration to Mint the Premium Bonds!.

The creepy trick that has swept the nation* is the platinum coin option, in which Treasury mints a $1 trillion platinum coin, deposits it at the Fed, and suddenly has an extra $1 trillion of money to spend without incurring any debt (and, thus, without breaching the debt ceiling). This is a good trick as tricks go, and it's been extensively advocated by Josh Barro, Paul Krugman, Matt Yglesias, Joe Weisenthal, basically every economics blogger really. I am unaware of any good arguments that the platinum coin wouldn't work, but it does have the problem that it is really really really really obviously a trick. I mean, it's a trillion dollar coin, come on. So it's sort of sub-optimal symbolically, and would make people really mad. It's a crisis-enhancer, although with the benefit of avoiding immediate default.

So there is an alternative that Matt Levine is putting forth:

Instead of just rolling those Treasuries -- paying them off at 100 cents on the dollar by issuing new Treasuries at 100 cents on the dollar -- it should pay them off at 100 cents on the dollar by issuing new Treasuries at 275 cents on the dollar and using the extra money to pay its bills. The 10-year yield today is around 2.6 percent, so you could sell a 10-year with a 23 percent coupon for 275 cents on the dollar.**** The 30-year is about 3.9 percent, so a 14 percent coupon should get you there. Etc. Math here.

Now, given my previous writing on Fixed Interest Payment Consol Bonds ... would this work too?

Yes, in a functional sense, of course it would. Its a similar, though not identical, answer, but it goes through the same loophole. Premium bonds are, by law, counted on their face value. So any bond with a face value substantially below its issue price that is used to roll over maturing long term bonds would "roll back" the debt ceiling count.

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Economic Populist: Will the White House Accept A Government Default, When It Doesn't Have To?

Over at Wonkblog Ezra Klein, one of MSNBC;s favorites neoliberals, writes:

The problem with President Obama’s shutdown strategy
...
 
The political theory here is clear: Obama is trying to marshal public opinion against the GOP. If enough Republicans are getting angry calls from their constituents and seeing polls that look disastrous for their party, they'll find a way to back down.

 
But it can backfire badly. Every second Obama stood at that podium made it a bit harder for the Republican Party to retreat. The more he repeats that this is their shutdown and they need to end it, the more their party suffers if they can't find a way to prove the president wrong. Obama's efforts to move public opinion toward him also moves Republican opinion against him.
...

 
... the White House is still pursuing a strategy that makes it harder for Boehner and the Republicans to back down. Their gamble is that the power of public opinion will overwhelm the power of presidential polarization. And if the Republican Party loses totally -- loses in a way where they can't tell themselves it was a win -- that'll be the end of these tactics.

The problem with this kind of brinksmanship tactics is that they may lead to an economic collapse ~ and given Europe's ongoing problems with the scourge of harsh austerity policies in the context of a monetary system built broken, that might be a worldwide economic collapse.

Now, the threat of the economic collapse does not come from the Government Shutdown, it comes from the risk of default on the government debt, due to the US Treasury running out of juggling options before it needs to sell a new issue of Treasury bonds to avoid a default on payment of government obligations.

And the puzzling point is that the Administration insists that the risk of default is real, even though the Administration itself can take the threat of default off the table.

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Economic Populist: How Fixed Interest Payment Consol Bonds Avoid A Default

I have talked about the broader economic/historic and political/ethical dimensions of Consol Bonds, but this diary is simply about how a certain type of Consol Bonds can be used to avoid default.

What do I mean by "Fixed Interest Payment" Consol Bonds? I mean a bond without a maturity date, that specifies the dollar amount to be paid as interest twice a year. These would be sold on the open market, just as we sell ordinary 10yr bonds. Since the dollar value of the interest payment is specified, and there is no maturity date, no Face Value is required, and so no Face Value is specified.

Consol Bonds are actually a quite old-fashioned type of bond, widely covered in elementary financial mathematics because of their simplicity.

The point of a Consol Bond was that there is no maturity date. Instead, the government just pays the interest, and if they want to retire the debt, they buy the Consol Bond back from the open market. "Consol" stands for "Consolidated", since they were originally used by the British, starting in Colonial Days before the French and Indian war to "consolidate" a number of different bonds with different maturity dates.

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Galbraith: Government Doesn't Have to Borrow to Spend

James K. Galbraith in Government Doesn’t Have to Borrow to Spend quite clearly and without economic jargon explains why the debt ceiling debate is puppet theater:

The debt ceiling was enacted in 1917 for one purpose: to fool the rubes back home. Just as Congress started running up debts to pay for the war, they voted in the ceiling to pretend otherwise. And that is why whenever reached, it must be raised.

...

In the modern world, when the Treasury writes you a check, your bank credits your account. That's how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economically necessary about the bonds. This is obvious since the Federal Reserve buys back many of them, leaving the public with the cash it would have had in the first place.

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Under present law, Jack Lew could even pay off public debt held by the Federal Reserve by issuing a high-value, legal-tender coin – so long as the coin happened to be platinum. A coin is not debt, so that simple exchange would retire the Fed's debt holdings and lower the total public debt below any given ceiling.

James Galbraith admits that this is a gimmick ... but then, so is the debt ceiling, so it would be one gimmick fixing the fact that one faction of one political party is holding the faith and credit of the US government hostage over what was originally and has always been since a gimmick.

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Economic Populist: Consol Bonds are the Debt Ceiling Walk Off Home Run

The Debt Ceiling debate is Yet Another GOP Abuse of the System, but the entire debate runs under the pretense that the Treasury cannot sell new bonds if the Debt Ceiling is not raised.

Look at the history of the debt ceiling, and its easy to see where people get that idea. Way back when, the Treasury went to Congress for each and every new bond issue. Then in 1917, with war breaking out in Europe, Congress reformed the system to give the Treasury more freedom of action, establishing an overall ceiling within which it could issue bonds. It was like moving from a series of individually negotiated loans with a bank to obtaining an approved credit line with the bank.

From 1917 to 2010, the increase of the debt ceiling when required was a routine transaction. But after the radical reactionary wing of the Republican party ran under the successful "Tea Party" branding, a number of radical reactionary GOP Congressmen balked at this routine transaction, and took the full faith and credit of the US Government hostage. This resulted in the "sequester" debacle, in which spending cuts that were deliberately designed to punish the American people in case Congress could not agree on the insane policy of cutting spending in the middle of what is now a five year old Depression. Congress could not agree, and so the brain-dead punitive spending cuts were put in place instead.

After that experience, turning out as badly as progressive populist critics at the time said it would, now there are bold words from the White House demanding a clean debt ceiling vote, without any hostage taking.

The good news is that if the Treasury turns to Consol Bonds, they can win this fight no matter what the radical reactionary wing of the House Republicans decide to do.

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Calling the Debt Ceiling Bluff: Taking It To The Owners

Joe Firestone has written an excellent piece at New Economic Perspectives on the phony fear mongering about the risk that the Republicans might not vote to raise the debt ceiling. He uses as his point of departure exquisitely fraudulent framing that Ezra Klein adopted for the proposal to trade a budget continuing resolution without defunding Obamacare, for taking the fight to the debt ceiling.

The reason the Republican leadership is making the case for that trade is that a continuing resolution has to pass both Chambers, and the version that defunds Obamacare is Dead On Arrival in the Senate, which will amend the bill to restore Obamacare funding and refuse to budge in reconciliation. So sooner or later, the House will have to pass a continuing resolution that includes funding for Obamacare, or else shoulder the political blame for shutting down government.

But what Joe focuses on is the framing of trading off a budget fight for a debt ceiling fight, in which Ezra says:

his is terrifying that this is the argument. And the analogy I would use is this is like trading a bad flu for septic shock. it is the worst trade in the history of all trades you could imagine . . .

Trading a bad flu for septic shock might be the worst trade in the history of all trades, but the only thing that makes the debt ceiling dangerous is the administration's refusal to call the bluff. As Joe lays out, there are not one, not two, not three, not four, but five options, and three of them would succeed in eliminating the threat that the debt ceiling vote can every again be used for political blackmail.

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Optimism in light of pessimism

So why be optimistic? This theme came up in a previous diary, and I'd like to revisit it, because I rather doubt that my previous answer satisfied my reading audience.

*****

Why would anyone want to be an optimist in this era? One can easily pick from news items to find a good number of reasons why one shouldn't be optimistic, and so for instance from vice.com we have this:

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Summers: Economic Inequality a Problem, but not the Fed Chair's Responsibility

Well, OK, I'm summarizing. I was startled to read at Agent Orange that Summers was a progressive thinker because Summers recognizes the massive increase in economic inequality that has taken place over the past three or four decades:

It would be, however, a serious mistake to suppose that our only problems are cyclical or amenable to macroeconomic solutions. Just as evolution from an agricultural to an industrial economy had far reaching implications for society, so too will the evolution from an industrial to a knowledge economy. Witness structural trends that predate the Great Recession and will be with us long after recovery is achieved: The most important of these is the strong shift in the market reward for a small minority of persons, relative to the rewards available to everyone else. In the United States, according to a recent CBO study, the incomes of the top 1 percent of the population have, after adjusting for inflation, risen by 275 percent from 1979 to 2007. At the same time, incomes for the middle class (in the study, the middle 60 percent of the income scale) grew by only 40 percent. Even this dismal figure overstates the fortunes of typical Americans; the number unable to find work or who have abandoned the job search has risen. In 1965, only 1 in 20 men between ages 25 and 54 was not working. By the end of this decade it will likely be 1 in 6—even if a full cyclical recovery is achieved.
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There is no issue that will be more important to the politics of the industrialized world over the next generation than its response to a market system that distributes rewards increasingly inequitably and generates growing disaffection in the middle class. ...

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