Category: Economics

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During the debt ceiling crisis back in 2011, I suggested that it would be no big deal if the government just “prioritized” spending so as to match revenues for however long it took Congress to get its act together and raise the debt ceiling. I got some push back on this by people who said I was crazy if I thought that much spending would suffice, but I never thought it would suffice—I was just sure that the result would be so onerous that Congress would knuckle under in no time. I figured that was what the Treasury secretly had in mind.

I’ve changed my mind.

It would have gone like this: The laws are contradictory—Congress sets the tax rates, Congress sets the spending levels, Congress sets the debt ceiling. The poor Treasury, simply doing the best it could in a no-win situation, would hold up pretty much all payments except interest on the debt, judges pay, soldiers pay, and social security. Once payments to major corporations in districts where recalcitrant Congressmen lived got held up, the stalemate would have ended pretty quickly.

I no longer think that’s what’s going to happen. Basically, I’ve come around the view that the Treasury meant what it said when it claimed that its hand were tied: It is legally required to spend the money the Congress has appropriated, whether the money is raised or not.

And I think there’s a solution.

Really, it’s the same solution as the “platinum coin” solution or the “issue scrip” solution, but those solutions are just gimmicks to put a pseudo-legalistic shine on what basically amounts to paying our bills by printing money.

I don’t think there’s any need for the gimmick. I think what the Treasury means to do once the headroom for keeping under the debt ceiling runs out is: Nothing. They’ll just go on writing checks exactly as they’ve been doing.

They’ll stop issuing new debt of course, so there’ll be no new money in their account at the Federal Reserve to pay the checks.

At which point, I’m reasonably sure, the Federal Reserve will just pay the checks anyway—which the Fed can easily do by just crediting the depositing bank’s account. (In other words, printing the money.)

Basically, the Fed would let the Treasury run an unlimited overdraft.

This works on several levels.

First of all, it doesn’t require any reprogramming or rejiggering of the Treasury’s numerous systems for making all the many payments they make every day. (No entity makes more payments than the US Treasury.) That’s good, because any attempt to do so would be problematic at best, and probably catastrophic in the short term.

Second, the people who are being most recalcitrant about raising the debt ceiling are the ones who would be most outraged. (I can just see them frothing at the mouth. Oh noes! Inflation!!1!)

Third, under the current circumstances, it would probably be good for the economy. I’ve pretty much come around to Paul Krugman’s analysis that at the zero bound there is no inflation risk to printing money. Even better, if it did produce some inflation, that might get us up off the zero bound. (I for one would be very pleased to be able to earn a return on my capital.)

A generation ago the Fed would have hated this—bankers used to hate overdrafts in the deepest depths of their bowels. But overdrafts have been so profitable for banks these past 20 years or so, I expect we have a whole generation of bankers who have gotten over it.

As to whether it’s really legal or not, that’s something for the courts to decide. The debt ceiling applies to debt “subject to the limit.” The Fed and the Treasury will just say that, while an overdraft is debt, it’s not debt “subject to the limit.” The debt ceiling will be resolved long before any court case plays out.

The Treasury never admitted to having any contingency plans last time. Their take on it was that not raising the debt ceiling was unthinkable, therefore they would not think about it. But this is the only thing I can think of that could actually play out without chaos. If they weren’t planning on doing this (or something much like it), they’d have done something by now (such as having a dry run of their scheme for prioritizing payments).

Last time, I figured we’d get an 11th hour deal. This time, I think it’s pretty likely that the debt ceiling won’t get raised, and I think the Treasury will actually end up doing this—so I thought I’d share my thinking in case people find it useful.

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It was on my first trip to England that I came to understand that what we think of as formal wear, business attire, and sports clothing was originally designed to be the most comfortable possible clothing for the circumstances. The circumstances in this case being the climate, technology, and infrastructure of England in the eighteenth and nineteenth century.

Without central heat interiors were going to be chilly, but even if you were quite frugal with your wood or coal they would not have to be really cold.

Given those indoor circumstances, and given that you had to make do with wool, silk, linen, and cotton (because there were no synthetic fibers), you would quite naturally end up with just the sort of garments that we now think of as being part of formal wear—wool coats and vests, silk bands to wrap around your neck, and so on. Sport clothing, of course, was for the sort of sports the English aristocracy engaged in: riding and shooting. Tweed and leather were very practical.

It seems obvious now, but it was something of a revelation to me. When I was younger, I always thought of that sort of clothing as being uncomfortable.

Partially that’s because such clothing is only really comfortable if it really fits. You don’t need a bespoke suit for it to fit correctly; even today good men’s clothing is routinely altered to fit. But clothing purchased for a child will never fit for long (and often never fit at all, because the child knows neither how the garment is supposed to fit nor how to articulate any issues discovered during the fitting).

Perhaps more important, such clothing is only comfortable in the sort of very cool environment for which it was originally designed. If your interior temperatures are around 60°F, you will be more comfortable in a wool coat over a wool vest than you would be in shirtsleeves. At 70°F it will be the other way around.

My attitudes toward such things has also been influenced by Jackie’s work with fiber. In my youth, my experience with wool was that it was scratchy, uncomfortable stuff (totally aside from it being made into garments that didn’t fit and were wrong for the climate). Now I’ve learned about the many different kinds of wool—starting with merino, of course, but by no means ending there—that are not scratchy. Now I have wonderful vests and sweaters, made to fit, from premium materials.

Of course, the top layers are really the last thing to think about. Comfortable clothing begins with the base layer. There again, my experiences as a child turned me against a whole very useful category: long underwear. Any clothing that you’re going to put another layer of clothing on top of needs to fit exactly right. An outer layer that’s too loose can be tolerated. But a too-loose under layer is going to get bunched up and shifted away from where it needs to be: Intolerable.

The ill-fitting hand-me-down long underwear I got as a child turned me against a whole category of garments that doubtless have an important role to play in comfortable dressing. I’m only now, more than two decades after returning to the Midwest, beginning to accumulate items for an appropriate cold-weather base layer. (I’ve made do up to now by having a wide range of top-layer options: spring jackets, fall jackets, winter coats, parkas, my Alaska pipeline coat.)

As a young man, I think I’d have been perfectly happy to wear nothing but shorts and t-shirts, and simply crank up the heat to make up the difference. My attitude has changed. If I had the money, I’d be very pleased to get and wear wool coats and vests, silk cravats, smoking jackets, and the like. Not because of the fashion statement they’d make (which would be a rather silly statement, however much I’ve come to appreciate a fine tweed), but because they’d be very comfortable.

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Prairie plants
Prairie plants
Prairie plants

One utterly predictable consequence of climate change is that the price of northern farmland will rise as growing regions shift north.

Tobias Buckell yesterday shared a report that just this sort of price shift is now occurring—interesting to me because this result is not merely predictable: I predicted it my own self, way back when I was in high school.

Global warming was still pretty speculative then (in the 1970s), but people were already talking about the greenhouse effect and trying to figure what the result would be. At the time, I was mainly thinking about the geopolitical implications of  shifting the growing regions north—how things would change if Canada and the (then) Soviet Union were suddenly way more productive of food, while places like the United States, China, and France suddenly less so.

What I discovered, though, was that those northern regions aren’t nearly as fertile as places like Illinois, where 8,000 years of tall grass prairie left an incredibly thick layer of rich soil.

No matter how perfect the climate is, Saskatchewan is not going to produce the bushels per acre of Illinois or Kansas. Their soil is not only less fertile, it’s also much more fragile than the soil of the tall grass prairies. The fertile layer isn’t as deep, so the land must be plowed with greater care, and it will in any case be more quickly depleted.

I’m sure there’s a lot more and better data available now than there was back then, but I doubt if it changes the fundamentals. Shifting growing regions means winners and losers, but it also means less total food production.

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Mike Tierney of the Navigating Your Money podcast interviewed me last week and has already put the show up. Listen to me natter on about frugal living here:

Episode #19: Live Like You Have More, On Less

I haven’t actually listened to it. I find the idea of doing so fills me with dread. (I’ve heard other people say similar things, but am a little surprised to find myself so strongly affected.)

Wise Bread’s Will Chen has assured me that I sound reasonably articulate:

I especially like the part where you explained that a budget is not a limit but rather a tool for showing you what you CAN have. The part about sharing tools is also a really awesome part. You did great, but the host is also really good. He clearly has read through your material and gets your philosophy.

So there you have it. If you’re interested in what I’ve been saying, but you want to hear it in my voice rather than reading it on the screen, here’s your chance.

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The tea-party right was willing to risk the hard stop in spending that would have resulted from running up against the debt limit—a game of chicken that neither the Democrats nor the sane fraction of the Republicans could take the risk of losing.

The fiscal cliff looks a little similar, but it’s much less dangerous. It’s a game that lends itself to playing through to the end, because the risk of losing isn’t nearly so bad.

Suppose we did go over the fiscal cliff. What would happen?

First, tax rates would go up for everybody. That’s bad, but it’s not terrible. Actually, taxes at those rates would produce revenue roughly equal to the amount of government people seem to want.

Second, spending would be cut, with the cuts falling on almost everything except Social Security. A lot of good stuff would be cut, but that might not be such a stiff price to pay, considering that a lot of the things that ought to be cut (such as defense spending far beyond our needs) would otherwise be very hard to cut.

The result would be a rough year or two, hard on everybody from working-class folks to defense contractors, but all those problems would be fixable. In fact, Congress would love to fix those problems! Congress could cut taxes! (Just not as much as Bush did.) Congress could boost spending! (Just not to current levels.) Really, there’s nothing congressmen like better than cutting taxes and spending money on stuff.

The other details are similar. The AMT would strike middle-class folks hard, but that could be fixed, too. In fact, having to fix it would be an opportunity to improve it—turn it back into what it was supposed to be, a minimum tax rate that applies to everyone, no matter how many tax shelters they have or how many special preferences they qualify for. The end of the “doc fix” would hurt health care providers, but that could be pretty easily fixed too. (We’ll no doubt have to make a lot of small changes to healthcare stuff, once health care reform goes into effect and we run into the inevitable glitches.)

It’s always hard to raise taxes and cut spending, so it’s hard to do what needs to be done. But that’s why the fiscal cliff is so perfect. Once we go over the edge, we won’t need to raise taxes and cut spending—we’ll need to cut taxes and raise spending, and that’s dead easy.

Dive over the fiscal cliff, then fix things. It’s not perfect, but it wouldn’t be nearly as bad as what we’ve got now.

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The town of Savoy, just south of Champaign, makes a point of having lower taxes. They do so by not providing many of the amenities that Champaign and Urbana provide—no bus service, no public library, etc. Residents, since they can be free riders on Champaign and Urbana services, like the situation just fine.

A few years back, the Champaign-Urbana Mass Transit District was looking to expand its service area into Savoy. Property owners in Savoy didn’t like that idea.

There are rules allowing taxing districts to annex adjacent areas and begin providing services—and assessing the tax. The rules make it pretty tough for an area to opt out; just about the only way is to already be in the taxing district of another service provider. With that in mind, Savoy created its own mass transit district a few years ago (the Champaign Southwest Mass Transit District). The idea was that it wouldn’t provide any mass transit service and wouldn’t levy any tax.

All very sad, of course, for anyone like me who uses the bus service, along with anyone who thinks that public services are a good idea. Which meant there was a bit of schadenfreude when, as anyone with any sense had foreseen, Savoy’s transit district promptly levied a small tax (to pay the legal cost of fighting CUMTD’s attempt to annex areas within the district anyway). Taxing districts levy taxes. It’s what they do.

Now we’re getting a bit more schadenfreude: People within Savoy’s transit district (the new YMCA and an apartment complex) are asking the district to provide transit services.

It’s funny, but it’s also kind of sad. I mean, the people who built the apartment complex and the YMCA surely knew that they were building in a place where there was no transit service. I’m sure they picked those locations because the land was cheap. Didn’t they stop to think that the reason the land was cheap was because of the lack of services?

On the one hand, I’m glad to see the Savoy transit district getting pressured to provide transit services. Providing transit services are what transit districts are supposed to do. And I have no sympathy for the residents who created the district in the hopes of dodging a tax—only a moron creates a taxing district while expecting not to be taxed.

But I’m still kind of sad. If transit service to the YMCA is important (and the YMCA says the lack of it is their visitor’s number one complaint), wouldn’t it have made more sense to build the new YMCA within the CUMTD service area? Instead, they build where they know there’s no service, and then complain about it: More sprawl and more bickering.

Of course, those are just more reasons why the Champaign Southwest Mass Transit District was a bad idea. I mean, really! Who’s so stupid as to create a taxing district hoping not to be taxed?

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One of my fellow Wise Bread writers, Nora Dunn, has been posting some of the financial details of her travel-heavy lifestyle, including this post on her 2011 Income. (It’s got a link to her earlier post on her 2011 spending, and promises a forthcoming post on why she chooses to earn this much money and not more.)

It’s pretty interesting for anyone who’s thinking about the sort of issues that I write about in my Wise Bread articles—how and why to spend less, and how and why to earn the money to support that frugal lifestyle (and not some other lifestyle).

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I’ve got a guest post up at Asta Lander’s blog Simply Living, about the trade-offs that people make when they choose to work for wages or a salary, and how you can get most of the benefits while avoiding most of the downside.

It’s called Choosing Freedom.

There was a time when most people were self-sufficient. They acquired what they needed through some mix of hunting, gathering, fishing, farming, raising animals, and making things themselves. Not many people do that any more.

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I was reminded yesterday that I wanted to mention Property Assessed Clean Energy, which came up in the course I’m taking on electric power. (What reminded me was Tobias Buckell’s post about how the real issue for photovoltaics is the capital cost of installing the capacity, which he mentioned in reference to a rather interesting article on issues with solar feed-in tariffs.)

Property Assessed Clean Energy (PACE) is a clever idea for funding homeowner investment in solar power. The way it works is this: The municipality raises money with a bond issue, then lends it to homeowners to invest in solar (or potentially wind) power generating capacity. That investment is then paid back to the municipality over 15 or 20 years via an assessment on the property tax bill. The money is easy for the homeowner to pay back, because the debt repayment is funded by savings on the power bill.

The property tax assessment stays with the house if it is sold, which is reasonable because the photovoltaic system or wind turbine stays with the house as well. This means that the capital is available quite cheaply, because the money is very likely to be paid back.

The really big win of PACE is that it greatly reduces the biggest financial risk that a homeowner takes when making an investment in solar power—the risk that he or she will end up having to move before the rather long payback period, and end up being on the hook to pay the loan back, without enjoying the benefits of the lower power bills.

The problem is, even though about half the states have laws authorizing some form of PACE, the whole scheme has been blocked by the Federal Housing Finance Agency, which instructed Fannie Mae and Freddie Mac not to underwrite mortgages on properties with a PACE assessment.

As I understand it, the issue is that the property tax assessment (like property taxes in general) are senior to the mortgage in the event of a default. But if this regulation is legitimate, the federal mortgage authorities can regulate all municipal activity. They could ban mortgages on houses where the municipality is funding public art through a property tax assessment (or on houses where the municipality isn’t funding public art). If this principle stands, municipal governments will have to do whatever the mortgage authorities demand, or else only people rich enough to pay cash would be able to buy a house in town.

There’s a group called PACENow that’s working various paths to get the prohibition reversed.

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Some years back, I read a financial newsletter article that offered a technique for predicting inflation rates six months in advance. It had charts that compared its predictions to actual results, that showed that it was pretty accurate. Not perfect, but more than close enough to be useful for short-term planning.

Then I read the details. Their “technique” was this:

  1. Take the actual inflation for the previous six months.
  2. Double it.

As I say, their technique was pretty accurate. Partially it was accurate because the economy rarely turns on a dime—recent trends tend to continue. But it was more accurate than that, because half the months they were “predicting” had already happened! Even if the next six months were rather different from the previous six months, that would only produce so much change in the full year results.

I think that was the point when I decided to let my subscription to that newsletter expire.