This commentary was written by Dr. Daniel Thornton of D.L. Thornton Economics. Thornton spent over three decades at the St. Louis Fed as vice president and economic advisor.
This essay presents three possible ways to end the debt-ceiling crisis and two other good ideas.
The first way to end the debt-ceiling crisis was suggested by Alan Blinder in an April 24 op-ed piece in the Wall Street Journal. Blinder wrote that President Joe Biden could invoke the 14th Amendment to the Constitution, which as Blinder put it, says, “the validity of the public debt of the United States ... shall not be questioned.”
A better way to end this crisis comes from noting that there are two debt measures: The total public debt, which weighs in at $31.5 trillion, and the debt held by the public, which is nearly $6.9 trillion smaller. The difference is due to bookkeeping entries that Congress makes to a host of so-called trust funds; the largest of which are the Social Security and Medicare Trust Funds. These bookkeeping entries are in the form of “Treasury securities” that the government has placed in these trust funds, but not yet sold to the public. These bookkeeping entries are made to convince the recipients of these programs that Congress will not renege on its promises.
The debt-ceiling crisis could be solved if the president instructs the Secretary of the Treasury, Janet Yellen, to borrow the “Treasury securities” in these trust funds and pay the government’s bills by issuing debt to the public. The total public debt would shrink and the debt held by the public would increase. Of course, this approach only works until the two debt measures converge. Given the rate of current deficit spending, this is likely three, maybe four, years away.
This method would be better and more lawful than what Secretary Yellen is currently doing, e.g., borrowing from the retirement accounts of federal workers. Blinder correctly points out, “Don’t try that if you’re running a company, but it’s legal for the federal government.”
By far, the best way to solve the debt-ceiling problem is for Congress to be honest with the public and end this bookkeeping charade. If it did, the total public debt and the debt held by the public would be equal and far less than the $31.4 trillion debt limit. In so doing, Congress should put an end to this debt-ceiling nonsense. It is a waste of time and money that could be used to deal with America’s more serious problems.
Two Other Good Ideas
- While Congress is at it, it should take the penny out of circulation. After all, its purchasing power is essentially nil.
- Congress also should replace the $1 bill, which is expensive to maintain, with the $1 coin. This would get into circulation the $1 coins that have already been minted but whiling away in vaults somewhere. Better yet, the government could mint a different commemorative $1 coin annually for a while. This would create a demand for these coins by collectors. Consequently, millions of these coins would be in coin collections. The government would be selling these coins for a dollar, which costs pennies to create, which is seigniorage at its finest!
This is a Hedgeye Guest Contributor piece written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.