In today’s New York Times, former chief of staff of the Joint Committee on Taxation Edward Kleinbard offers another suggestion for how the federal government might meet its obligations if the debt ceiling is reached:
Most of the ideas floated so far would either severely disrupt the public markets for Treasury debt or rely on a constitutional claim of executive authority so far-reaching that we would very likely spend the next two years locked in an impeachment fight.
Some have suggested, for instance, that the president could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations. But the Constitution is clear, and Mr. Obama agrees, that Congress alone has the power to authorize new borrowing.
Other supposed solutions — like the notion that the Treasury Department could create a $1 trillion dollar platinum coin and deposit it in its own account at the Federal Reserve — are even more fantastical.
However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He 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.
The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.
I happen to think this is a sensible solution, for the reasons he outlined, so I’m happy Kleinbard raised it for that reason. Of course, it hardly makes hitting the debt ceiling an acceptable option — and it’s worth noting that the proliferation of these “how to fund government without congressional authority” ideas would probably strengthen, not weaken, the resolve of the tranche of congressional Republicans who are refusing to fund government, by removing the most serious consequences and freeing them from much of the culpability.
Regardless, Kleinbard’s plan is plausible, but it’s telling which example he has to pick in order to prove it:
The strategy may sound far-fetched, but it has been used before: in fact, California relied on it as recently as 2009.
Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.
Whether as a result of public shaming, pressure from banks or a newfound sense of responsibility, the Legislature quickly worked out a budget deal and the scrip was then redeemed for cash.
So that’s another upside to this strategy: Rather than resorting to the platinum-coin option and potentially roiling financial markets with the suggestion that our monetary system is now run like a banana republic’s, we could just be honest and admit that the federal government’s fiscal situation looks increasingly like that of California, the woeful state of which has been covered extensively by groups such as the Manhattan Institute. This past fall, the state’s voters gave a pretty clear indication of how they’re going to solve the problem, approving in a referendum a huge amount of tax increases proposed by Governor Jerry Brown. It remains unclear if these will actually raise the revenue they’re expected to, but California’s tax and regulatory climate, as MI documented, has already been causing a “Great California Exodus,” suggesting California voters haven’t quite hit on the right answer.
The U.S.’s reckoning is a lot farther down the road than California’s, but if we were to hit the debt ceiling, Kleinbard’s suggestion is a reminder of where simple acquiescence about our current trajectory leaves us: the Golden State’s levels of growth-inhibiting debt, diminishing competitiveness, and ever-more-onerous taxes.