Archives for posts with tag: budget

The Congress shall have Power … To borrow Money on the credit of the United States; … To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States … [and] To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”

U.S. Constitution, Article I, Section 8[1]

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

U.S. Constitution, Article I, Section 10[2]

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

U.S. Constitution, 10th Amendment[3]

[This is Larry, and we’re back to talk more about appropriations, money, debt and cash. Once again Elemental Zoo has me researching the law of things about which I know practically nothing, only this time it’s worse. I don’t know much about economics, either. Nevertheless, I will soldier on, but carefully, by breaking our subject into small pieces, and attempting to make sense of the parts. Hopefully when we’re done the sum of all of them also will make sense.

Last time we discussed federal appropriations – i.e., spending authority – and how our government is required to discontinue operations and send people home when it runs out of the authority to spend to keep things going. But we also noted that, even if our government has authority to continue operations, it may not be able to pay all of its bills. That’s because each year our government operates at a deficit; its revenues are less than expenditures, and it makes up the difference by borrowing from strangers. Unfortunately Congress has put a limit on the government’s total debt, so at some point it may run out of cash and not be able to borrow to make payments as they come due.

At that point I made a bad joke. I suggested that, since Congress had the authority to print money, it should just authorize the government to print a few trillion extra dollars, and tell President Trump to apply that to retiring a large part of the federal debt. All parties could agree that this was a “one-time” maneuver, not to be repeated, so investors shouldn’t worry. After all, they would get their money back. And by the way, Congress already may have authorized the Government to do this, by permitting the Secretary of the Treasury to mint bullion coins of unspecified denomination at his [or her] discretion[4]. Also there are historical precedents for issuing more money when needed, most notably in Weimar Germany[5], but also more recently in Zimbabwe[6] and today possibly in Venezuela.[7]

It’s a bad joke, but raises a good question, to wit: What role does our Congress have in making the physical dollars that you and I spend in our daily lives. Can Congress print more whenever it wants to?]

The Constitution

So what does Article 1, Section 8 of our Constitution say? The relevant parts are quoted above. Congress has the power to “coin” money and regulate the value thereof. The states do not. Article 1, Section 10 says the states can’t “coin” money, “emit” bills of credit, or make any “thing” except gold or silver coin something that can be tendered to satisfy a debt. States can’t make money at their own discretion; they have to use the stuff created by the feds.

So how about paper money? Who can make that? Obviously not the states, but how about Congress? Does the power to “coin” money include the power to print the paper kind? That question was raised, sort of, to the Supreme Court in the early 19th Century. The decision, an opinion authored by John Marshal, our first famous Chief Justice, is McCulloch v, Maryland.[8]

That case involved a central bank – the Second Bank of the United States – created by Congress to move money for the central government. Maryland challenged the constitutionality of the Bank, arguing that Congress had no specific authority to create such a thing, and therefore was barred from doing so by the 10th Amendment. Powers not delegated to the United States were reserved for the “States” or the “People.” And since the Bank wasn’t properly authorized, neither were its works. So said Maryland.

The Court saw it differently. There is no requirement that the Constitution specifically authorize a central bank. The power to raise revenue, and apply it to “national purposes” implied “the power [to convey] money from place to place, as the exigencies of the nation may require, and [to employ] the usual means of conveyance.”[9] In short, if the Government can coin, raise and spend money, it can create a bank if one is “appropriate” to help it do the job.[10] And if that bank needed to issue banknotes on behalf of the federal government, then so be it. The notes issued by the Second Bank weren’t directly in play in McCulloch v, Maryland, but the bank was upheld and, by implication, so was its currency.

I wouldn’t call that an iron-clad legal opinion; it’s more of an educated guess by an amateur; but there’s lots of our paper money out right now and nobody seems to mind. So I’m not losing any sleep over my conclusion.

Paper Money Today

How do we make paper money? Well, the actual printing is complex, in large part because of the security countermeasures governments have to use to foil counterfeiters, hackers and other bad people;[11] but the bureaucracy involved is not too bad. The Federal Bureau of Printing and Engraving [the BPE], an organization within the Department of the Treasury, does the actual work. It prints money – so-called Federal Reserve Notes – to be delivered to the Federal Reserve System, the current version of our central bank. “U.S. currency,” it says, “is used as a medium of exchange and store of value around the world.”[12] Currently there are “approximately $1.43 trillion worth of Federal Reserve notes in circulation.”[13]

These are big numbers, but what do they mean? Well, first that paper money is printed [and destroyed] on the order – or more likely the recommendation – of the Federal Reserve. At the end of the day, the Federal Reserve can’t order the Treasury to do anything.[14] But the Fed is responsible by law for supervising the issuance and retirement of [Federal Reserve] notes – our paper currency.[15] So as a bureaucratic matter I don’t see Treasury’s Bureau of Printing and Engraving turning down many requests from that source.

And how does the Federal Reserve determine how much paper money needs to circulate? Good question. [16] According to the Fed, it looks at “payments of currency to and receipts of currency from circulation and the number of unfit notes destroyed at the Reserve Banks.” Fed staff estimates demand for currency “based on monthly monitoring, forecasts of growth rates for payments of currency to circulation and receipts of currency from circulation, operational factors, and other policy considerations.” Historically, “more than 90 percent of the notes that the Board orders each year replace unfit currency that Reserve Banks receive from circulation.”[17]

There, isn’t that clear? What I get from it is that the Fed looks at the actual ebb and flow of U.S. currency in the world, then throws in “other policy considerations” when deciding how much more to print. Don’t be paranoid, folks, but when bureaucrats start talking about “policy considerations,” we just naturally want to ask more questions. That’s kind of an iron rule with this blog, no matter what the subject; in this case we have yet to find answers; but stay tuned. We haven’t given up.

Conclusion

At the end of the day our most excellent Congress has the final say about how much U.S. paper money circulates in the world. It’s Congress that has the power to “coin money;” granted it has created instrumentalities to help with that, the Federal Reserve and Treasury’s Bureau of Printing and Engraving, but they can be changed by legislation; the Constitution cannot. So “Watch the Skies!” – No, wait, that’s a different movie – “Watch your Congressperson!” to see if he or she begins to preach new or innovative solutions to our budget problems. Pay special attention if the magic solutions involve printing lots of greenbacks.[18] Otherwise, have a nice day.

[1] See U.S. Constitution, Article I, Section 8. We prefer to get the Constitution and the first 10 Amendments [the Bill of Rights] from the National Archives, at https://www.archives.gov/founding-docs . You can find Amendments 11 – 27 at https://www.archives.gov/founding-docs/amendments-11-27

[2] See U.S. Constitution, Article I, Section 10.

[3] See U.S. Constitution, Amendment X, available at https://www.archives.gov/founding-docs/bill-of-rights-transcript

[4] See The Washington Post, Wonkblog, Matthews, Michael Castle: Unsuspecting godfather of the $1 trillion coin solution (2013/01/04), at  http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/04/michael-castle-unsuspecting-godfather-of-the-1-trillion-coin-solution/?wpisrc=nl_showdown . Actually, I wasn’t able to verify the precise quote given, but I found something similar at 31 U.S.C. §5112(k): “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.” You can find 31 U.S.C. §5112 at https://www.gpo.gov/fdsys/pkg/USCODE-2011-title31/pdf/USCODE-2011-title31-subtitleIV-chap51-subchapII-sec5112.pdf

[5] See the blog of 11/12/2010, The Wages of Hyperinflation, at http://elementalzoo.typepad.com/elemental-zoo/2010/11/index.html . That one deals with hyperinflation in Weimar Germany. See also Adam Smith, Paper Money (Summit, 1981) at Ch. 4, The Chilling Symbol: A Wheelbarrow Full of Money, p. 55 – 63.

[6] See CNN World, Zimbabwe to print first $100 trillion note (January 16, 2009), at http://articles.cnn.com/2009-01-16/world/zimbawe.currency_1_zimbabwe-dollar-south-african-rand-dollar-note?_s=PM:WORLD

[7] See Los Angeles Times, Linthicum et al., Roiled by protests and soaring inflation, Venezuela is pushing out foreign companies (April 22, 2017), available at  http://www.latimes.com/world/mexico-americas/la-fg-venezuela-gm-20170420-story.html

[8] See McCulloch v, Maryland, 17 U.S. (4 Wheaton) 316 (1819). [According to the Supreme Court’s website, it was actually decided on March 6, 1819]. If you can’t find an official report, you can get an unofficial version from Justicia at https://supreme.justia.com/cases/federal/us/17/316/case.html .

[9] Id. at 407-408: “Although, among the enumerated powers of Government, we do not find the word “bank” or “incorporation,” we find the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies. The sword and the purse, all the external relations, and no inconsiderable portion of the industry of the nation are intrusted [today, entrusted] to its Government. It can never be pretended that these vast powers draw after them others of inferior importance merely because they are inferior. Such an idea can never be advanced. But it may with great reason be contended that a Government [entrusted] with such ample powers, on the due execution of which the happiness and prosperity of the Nation so vitally depends, must also be [entrusted] with ample means for their execution. The power being given, it is the interest of the Nation to facilitate its execution. It can never be their interest, and cannot be presumed to have been their intention, to clog and embarrass its execution by withholding the most appropriate means.”

[10] The court noted that the decision might have been otherwise under the Articles of Confederation, the compact that preceded our Constitution, and earlier drafts of Article I, Section 8 also required all federal powers, even incidental or minor ones, to be expressly defined. But in the end, that’s not what the Constitution says. Instead, it authorizes Congress to enact all laws that are “necessary and proper” for carrying into execution its powers or any other powers vested in the Government. [That’s in Article I, Section 8]. “The result of the most careful and attentive consideration bestowed upon this clause is, that if it does not enlarge, it cannot be construed to restrain the powers of Congress, or to impair the rights of the legislature to exercise its best judgment in the selection of measures to carry into execution the constitutional powers of the government. If no other motive for its insertion can be suggested, a sufficient one is found in the desire to remove all doubts respecting the right to legislate on that vast mass of incidental powers which must be involved in the constitution, if that instrument be not a splendid bauble.” Id. at 420 – 421.

[11] If you want to know more about how to print money, Wikipedia has an impressive introductory write-up at https://en.wikipedia.org/wiki/Security_printing .

[12] See Department of the Treasury, Bureau of Engraving and Printing, at U.S. Currency, http://moneyfactory.gov/uscurrency.html

[13] Id., citing the Federal Reserve Bank.

[14] See 12 U.S.C. §246: “Nothing in [the Fed’s enabling legislation] shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”

[15] See 12 U.S.C. §248(d), Supervising and regulating issue and retirement of notes.

[16] To answer this we looked at the 102nd Annual Report of the Board of Governors of the Federal Reserve System (2015), which is the most recent one we could find. We’ll cite it as 102nd Annual Report at __. It’s available at www.federalreserve.gov/publications/default.htm .

[17] See 102nd Annual Report at p. 401, Currency Budget.

[18] I don’t want to be a pest, but do take a look at our blog of 7 years ago. See the blog of 11/12/2010, The Wages of Hyperinflation, at http://elementalzoo.typepad.com/elemental-zoo/2010/11/index.html [Hyperinflation in Weimar Germany]. See also Adam Smith, Paper Money (Summit, 1981) at Ch. 4, The Chilling Symbol: A Wheelbarrow Full of Money, p. 55 – 63.

 

[The word for today is “gormless.” Go to any popular online dictionary, and you’ll find that it’s a 19th Century expression that means something on the order of “lacking intelligence,” or “stupid.” [1] But if you see something stupid why not just call it that and be done with it? This is the 21st Century and KISS is our motto.[2] Why interject a ten dollar word when a fifty cent epithet will do? Well, because there are meanings and shades of meanings. Sometimes the more complex expression does a better job of describing actual situations.

Take “gormless.” The old spelling was “gaumless,” and the verb form “to gaum” meant variously to handle in some improper fashion, to smear with a sticky substance, or to stare vacantly. [3] What a series of images! Imagine them all together, wrapped up in a single person or group: fumbling around, staring and spreading sticky goo. Is there a better visual for modern politics?

Perhaps. But if ‘gauming’ implies sticky, vacuous mishandling, why are people who don’t gaum – i.e., the gaumless – also stupid in some fashion? Frankly, I don’t know. Perhaps it’s just one of the peculiarities of the English language. Or perhaps we should blame Emily Bronte, who wrote Wuthering Heights. She’s the one who said: “Did I ever look so stupid, so ‘gaumless’ as Joseph calls it?”[4]]

Anyway, let’s move on to the latest antics of our gaumless (or gormless) politicians. I’m speaking, of course, of the forthcoming “sequester” (i.e., reduction) of the Government’s spending authority for the remainder of this fiscal year. As we pointed out last month, the ground rules for the current sequester were modified in January by the American Taxpayer Relief Act of 2012.[5]

A 2011 statute set out a 10 year program for reducing the federal deficit.[6]    In general, the concept is simple, even though its execution is not. In the event that the spending authority granted by Congress in any given year creates a deficit that exceeds the target for that year, spending automatically will be reduced. How? By reducing the authorized spending levels. And how does that happen? Well, it’s a bit mysterious.

Cuts will be made in “discretionary” spending only, and a series of exemptions are authorized. The 2011 statute speaks of spending categories, and accounts[7] within those categories.  Apparently all categories of spending are subject to reduction, but some accounts within categories may be exempt. The rest – the non-exempt – will be reduced by a uniform percentage large enough to eliminate the deficit overrun.[8]

Is there an actual list of which accounts are subject to, and which are exempt from sequestration? Yes, but you won’t find it in the law passed in 2011. You have to go to Title 2 of the United States Code for the answer. Social Security, Veterans Benefits, interest on the National Debt, military personnel and a hodgepodge of other accounts are specifically exempted there.[9]

The American Taxpayer Relief Act of 2012 didn’t change any of that very much, but it did postpone the effective date of sequestration for this year (FY 2013)[10] until sometime in March.[11] So, not to put too fine a point on it, the Administration now has seven months to make a year’s worth of cuts in its discretionary spending. That should hurt a bit, at least for the people affected.

Now let’s move back to the main topic of our piece. There’s a great debate right now about sequestration, and about who’s responsible for the current mess. Which side is right, and which is gormless? This is not an easy question because both parties created the situation. A divided Congress wrote and passed the deficit reduction law in 2011, and the President signed it. So, rather than pick on individuals, I think it’s better to concentrate on the gormless arguments currently in fashion. Each side has some, and all are ridiculous.

Take, for example, the notion that, instead of uniformly reducing all spending accounts, we should craft a budget that reduces or eliminates wasteful or ineffective programs, and leave the rest alone. That’s all very fine but, you know, that’s what Congress is supposed to do when it passes a budget. Obviously Congress failed this year; otherwise we wouldn’t have to go into automatic spending cuts. What’s the point of asking them to try again? Who really believes the Congress can achieve a better result in the next few days?

One Republican proposal is that the Congress should just punt on deciding what cuts to make. Instead, it should give the President authority to make whatever cuts he wants, so long as he makes enough of them.[12] But the President isn’t buying that solution. He says that there’s no good way to make all of those cuts, without affecting good programs, and he doesn’t want to be stuck with that[13]. He’d rather stay with the current system, where he can deplore all cuts, and blame the Republicans for the unpopular ones.

And how does he get to do that? After all, he and the Senate Democrats helped create the sequestration process. My guess is that he’s expecting the public to (i) forget that he signed the sequestration law and (ii) focus its ire solely on the Republicans, largely because they’ve been the biggest proponents of budget cuts. Good luck on that. Presumably the Republicans will find a way to share the credit.

Then there’s the argument that sequestration will hurt the national defense. How do we know that? Well, recently the Navy canceled deployment of a second aircraft carrier to the Persian Gulf,[14] reportedly because of sequestration and budget worries. Do you really believe that? Apparently the task force will go to sea, but not to the Persian Gulf. Where are the savings? And in an organization the size of the Navy, there’s always money around for the really important stuff. Obviously the Navy didn’t think that providing a second carrier to threaten Iran was as important as other things on its agenda. What things? Beats me! No doubt that information is classified.

And finally, there’s the Conservative argument that sequestration is an important tool for reducing the deficit, and we need to do that for the sake of our children. You know, there was a time when I too believed such things, but I’m not sure that today’s Movement Conservatives are very good spokespersons for a balanced budget.

No doubt you all remember the Ryan Budget from the last election cycle. That’s the budget proposal, dearly beloved on the Right, that restructured [i.e., reduced] social programs, lowered taxes, then added tens of billions of dollars to annual defense spending for the foreseeable future.[15] The Conservatives weren’t serious about balancing the budget or reducing the deficit; they just wanted a source of funds for tax cuts and more foreign wars.

So where are we in the sequestration debate? Which side is right, and which is gormless? Well, right now it’s too close to call. Both sides are prone to silly and irrelevant arguments but, at the end of the day, both are also clear on their objectives. The Republicans don’t want to raise additional revenue, even by closing tax “loopholes;” while the President wants to do lots of that. The President doesn’t want to cut programs, even by a little bit, while the Republicans want to do that.

The two sides might find a way forward in a compromise that does a little of both. Then why do they argue so much? Well, most likely the silly arguments are for our consumption; you see, both sides agree on one thing for sure; that we, the public, are the gormless ones, and need to be amused, and fooled, whenever possible.


[1] See, e.g., the Merriam Webster Online Dictionary, at http://www.merriam-webster.com/dictionary/gormless

[2] For those of you who don’t know, that’s “Keep It Simple, Stupid.”

[3] See The Compact Edition of the Oxford English Dictionary, Complete Text Reproduced Micrographically (Oxford, 1971) at gaum, Vol. I, p. 82. Hereafter, the Dictionary will be cited as OED at ___.

[4] The OED provides the quote. See OED at gaumless, Vol. 1, p. 82. The OED defines gaumless as “Wanting sense or discernment.”

[5] Public Law 112-240 (January 2, 2013), 126 Stat. 2313. Eventually you’ll be able to get the slip law from the Government Printing Office, but apparently not yet. When it’s available, it should appear at http://www.gpo.gov/fdsys/browse/collection.action?collectionCode=PLAW&browsePath=112%2FPUBLIC%2F%5B200%3B%5D&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=70

[6] See Budget Control Act of 2011 (August 2, 2011), 125 Stat. 240. Title I sets out the sequestration process.

[7] What’s an account? See 2 U.S.C. §905(j): “For purposes of subsections (b), (g), and (h) of this section, each account is identified by the designated budget account identification code number set forth in the Budget of the United States Government 2010–Appendix, and an activity within an account is designated by the name of the activity and the identification code number of the account.” There, does that help? If you want an online source for this material, go to http://www.law.cornell.edu/uscode/text/2/905 That’s the source we use here at Elemental Zoo Two

[8] See Budget Control Act of 2011 (August 2, 2011), 125 Stat. 240, 241 at § 101 (amending § 251 of the 1985 Gramm-Rudman Act):  “(2) ELIMINATING A BREACH.—Each non-exempt account within a category shall be reduced by a dollar amount calculated by multiplying the enacted level of sequestrable [ouch!]budgetary resources in that account at that time by the uniform percentage necessary to eliminate a breach within that category.”

[9] See 2 U.S.C. §905. The President can exempt military personnel accounts; the rest are exempted automatically by statute. Again, for a good online source for this material, go to http://www.law.cornell.edu/uscode/text/2/905

[10] Fiscal Year 2013 began On October 1, 2012. Sequestration won’t start until the 6th month of FY 2013.

[11] When? We didn’t know back in January, and we’re still not sure. See the blog of 01/09/2013, More Notes on the Coming Sequestration and the National Debt. You can find it on Typepad, at http://elementalzoo.typepad.com/elemental-zoo/

[12] See The Examiner, Gehrke, Libertarian senators: Give Obama the flexibility to implement sequestration — he’ll hate it (February 27, 2013) at http://washingtonexaminer.com/libertarian-senators-give-obama-the-flexibility-to-implement-sequestration-hell-hate-it/article/2522754?custom_click=rss

[13] See Daily Press, Shapiro & Lessig, Obama: Sequestration demands a compromise (February 27, 2013) at http://www.dailypress.com/news/breaking/dp-nws-shipyard-obama-speech-main-20130227,0,2656019.story

[14] See U.S. News on NBC News.com, Miklaszewski & Rafferty, Navy to pull aircraft carrier from Persian Gulf over budget worries (6 Feb. 2013) at http://usnews.nbcnews.com/_news/2013/02/06/16873226-navy-to-pull-aircraft-carrier-from-persian-gulf-over-budget-worries?lite

[15] See, e.g., The Foundry, Graham, Paul Ryan’s Budget Proposal Makes Defense a Priority (March 22, 2012) at http://blog.heritage.org/2012/03/22/paul-ryans-budget-proposal-makes-defense-a-priority/