I keep hesitating to write about this because it sounds insane, but Jack Balkin’s a professor at Yale Law School so I’ll let him say it:

Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time. Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

It’s right here in 31 USC § 5112 “Denominations, specifications, and design of coins.” It’s super-prescriptive about all kinds of things until you get to section (k):

(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.

It actually seems to me that there’s a colorable argument that President Obama is legally obliged to order Secretary Geithner to order the mint to start creating large denomination platinum coins. The debt ceiling is legally binding. We can’t borrow any more money. But at the same time, the Social Security Act is still valid. There are appropriations bills that extend through September. The assumption is that starting August 2, the Treasury will start “prioritizing” payments. But whence the legal authority to do that. By contrast, the legal authority to mint platinum coins is right there in the statute. This would, I assume, lead to a downgrading of American sovereign debt.

By Matthew Cameron

There’s a lot wrong with the U.S. economy — that much everyone can agree upon. But beyond that, there are a variety of different hypotheses about what exactly is keeping growth sluggish and joblessness high. Consider the latest theory that has been cooked up by House conservatives who are attempting to justify their assault on federal environmental regulations:

The unusual breadth of the attack, explained Representative Mike Simpson, a Republican from Idaho, is a measure of his party’s intense frustration over cumbersome environmental rules.

“Many of us think that the overregulation from E.P.A. is at the heart of our stalled economy,” Mr. Simpson said, referring to the Environmental Protection Agency. “I hear it from Democratic members as well.”

Readers will recall, however, that the latest BLS jobs data told a different story:

Indeed, mining and oil and gas extraction, which tend to be the primary targets of environmental regulation, are among the fastest growing sectors of the economy. Now, perhaps it is the case that oppressive environmental regulations are the cause of the logging industry’s unusually poor economic performance. But it seems more likely that this is due to a slowdown in new home construction, which could be remedied more effectively by boosting aggregate demand.

Harry Truman, speaking to Congress in 1945, proposed a nationwide system of single payer health insurance:

The fourth problem has to do with the high cost of individual medical care. The principal reason why people do not receive the care they need is that they cannot afford to pay for it on an individual basis at the time they need it. This is true not only for needy persons. It is also true for a large proportion of normally self-supporting persons. In the aggregate, all health services–from public health agencies, physicians, hospitals, dentists, nurses and laboratories–absorb only about 4 percent of the national income. We can afford to spend more for health.

But four percent is only an average. It is cold comfort in individual cases. Individual families pay their individual costs, and not average costs. They may be hit by sickness that calls for many times the average cost–in extreme cases for more than their annual income. When this happens they may come face to face with economic disaster. Many families, fearful of expense, delay calling the doctor long beyond the time when medical care would do the most good.

At that time, in other words, you could have financed a nationwide health insurance system with something like a 4-5 percent Value Added Tax, depending on how much you wanted in copays and deductibles. By today, of course, the system would be more expensive than that. But the evidence suggests that costs would have grown more slowly than they have in the actual United States. Today, though, you’d need more like a 20 percent VAT to move to Universal Medicare. And that, obviously, is a much heavier lift politically. Basically the best time to build your universal health insurance system was a long time ago before costs spiraled.

If you want the latest on confused debt ceiling related developments as they happen I’d suggest you check out my twitter feed or the mighty TP Economy feed. Blogs are so 2007.

Robin Hanson is apparently the kind of libertarian who believes in government-created monopolies over the use of ideas:

You have no fundamental right to enjoy the innovations produced by others without compensating them. You owe them, at least your gratitude. Yes for now it may be best to let you take innovations freely without paying, since the alternative seems too expensive. But you have no right to expect that situation to last forever, any more than ranchers had a right to expect they could forever let their animals trample nearby farms.

I’m not really sure what sense the term “fundamental right” is being used here. But I’m always curious how far people want to press that kind of theory. Are we sad that Isaac Newton was unable to patent a method for calculating instantaneous rates of change? Does Hanson think he should be paying royalties to Michael Spence every time he writes about signaling? Obviously, people who come up with smart ideas have the right to not share those ideas with the world. But the idea that a person, having shared his ideas with the world, now has the right to call the cops and have people arrested for taking inspiration from the idea without paying for a license in advance seems odd. Which is exactly why historically government regulation of idea-copying has been the exception rather than the rule. Maybe some of those exceptions have done some good. But the trend toward every stronger IP rules seems to me very difficult to explain as progressive vindication of some kind of natural right to not have your ideas imitated.

My own ideas on this particular subject (and of course other subjects) are deeply indebted to the thinking of others, and I like to think that in my work I’ve also influenced other people’s thinking. It’s all to the good that this pattern of mutual influence occurs without licensing agreements. The lack of “incentive” to innovate with new ideas isn’t holding me back nearly as much as I would be held back by inability to borrow ideas from other people.

One problem with the post below is that as is often the case with historical analogies, some people want to argue the history rather than the analogy. So for the record, I agree with those correspondents who disagree with Bob Kuttner’s characterization of the origins of World War One. He seems to be going with something akin to the Barbara Tuchmann view from A March Of Folly that it was basically all one big accident.

My understanding of the situation arguably makes the analogy even closer. The way this goes, the German government knew that it’s Habsburg ally was in rickety shape in an era of growing nationalism. It also feared catch-up economic growth and industrialization in Russia. It thought, in other words, that the balance of power between German/Austria and France/Russia was shifting in a bad direction. Consequently, when the crisis broke out over the assassination of Archduke Ferdinand, the German government consistently favored pressing in the direction of the war and brinksmanship precisely because they preferred to fight sooner rather than later. One can posit that the GOP is behaving in a somewhat similar manner, feeling that the demographic composition of the country is tilting against conservatism and thus you need to lock entitlement cuts in sooner rather than later.

That said, the point was not so much about the war as it was about Angell’s Fallacy. Norman Angell wrote a very good book explaining that a war between the European great powers would be a negative-sum fiasco. He tacked on to that book the further contention that such a war wouldn’t happen, since it would be a negative-sum fiasco. But then the war came.

Excellent point from Bob Kuttner, who argues that just because a debt ceiling related catastrophe would be catastrophic is no reason to assume it won’t happen:

For those who think that a default won’t happen because it is in nobody’s interest, think back on World War I. It was in nobody’s interest. Yet it destroyed Europe’s common civilization and ushered in nearly a century of economic instability and war. World War I occurred because both sides dug in and assumed the other would have to blink first. But that was a miscalculation. Instead of a last-minute deal, we got four years of trench warfare, economic ruin, and millions of wasted lives. Oops.

Call it Angell’s Fallacy: “X won’t happen because X would be insane.” But these things do happen! What’s more, I think I already see people underestimating the downside to even a small TARP-like “blip” where a deal is reached at the 11th hour, but fails in Congress, and then passes a day or two later. The U.S. has a AAA-rating because the amount of debt we have outstanding is modest compared to the economic resources of the country. The fact that we’re currently a low-tax country further counts in our favor, because it indicates that we clearly have the capacity to raise more revenue if needed to pay our bills. But the current standoff is revealing the fact that compared to other AAA-rated sovereigns, the decision-making apparatus of our political system doesn’t really function. Unless that turns around in the next few days, there’ll be a price to be paid. Chinese currency policy will probably moderate its impact in the short-term, but the impact will last.

I kind of feel like people throw the word “bubble” around too loosely, and Richard Waters ought to at least consider the possibility that the sky-high valuations of patent-owning firms reflect the real economic value of the legal authority to extort money out of firms with products:

In the month since an auction of patents from the bankrupt Nortel Networks ended with a shockingly high bid of $4.5bn, or five times the initial offer, the favourite game in tech circles has been to find the next big chest of buried gold. [...] As always in tech bubbles, it is the “pure plays” that have drawn the most interest – in this case, the companies set up mainly to exploit the value of pure IP, rather than actually to build things. Shares in InterDigital, which specialises in mobile communications IP, have soared 75 per cent since it said last week that it was looking at putting itself up for sale: with a market value of $3.2bn even before any auction begins. [...] But even that pales in comparison with VirnetX. Despite having only one licensee for its internet security technology and royalties of just $17,000 in its latest quarter, VirnetX’s 14 US and 16 non-US patents pack a punch: with lawsuits out against Cisco, Apple and Avaya, among others, its stock market value has jumped more than fivefold in the past year, to $1.6bn.

It’s possible that this is a bubble. But smartphone sales have, in fact, soared over the past several years and there’s plenty of remaining room for growth. And it turns out that amassing patents and threatening to sue smartphone makers is a viable line of business. It also turns out that selling your patents to smartphone makers in order to let them sue or countersue competitors is a viable line of business. We’re not experiencing an unsustainable bubble in smartphone sales, so I see no reason to think that skyrocketing valuations of smartphone-related patents reflect anything other than a basic market dynamic. It looks like a bubble to some observers because it sounds insane that you could get rich off smartphones without actually selling smartphones or smartphone components to anyone. But the current state of law and policy really is that bad. What we’re getting here is a market test of a portion of the value of the rents created by the Patent And Trademark Office.

I loved the conclusion of Suzy Khimm’s piece about the clout of the Congressional Budget Office:

Such power has led some to question whether the CBO has an undue amount of influence on Washington politics and policymaking. “You know you’re not God,” Senate Finance Committee Chairman Max Baucus (D-Mont.) told Elmendorf during a 2009 congressional hearing. But some observers think those complaints say more about the frustration of dealing with an honest agency than about the agency itself. “It’s easy to say ‘the CBO made me do it,’ but they’re just providing information,” says Philip Joyce, a public policy professor at the University of Maryland and former CBO staffer. “People can use that information however they want to.”

Elmendorf, for his part, agrees. Whether legislation passes “depends on the judgment of members of Congress,” he told The Postin 2009. “We’ll provide information that helps them make that judgment. But the decisions are theirs.”

That’s just right. And part of what’s happened over the past few years is that I think people have started using the CBO wrong. The way this ought to work, roughly speaking, is that members of Congress frame a policy that does what they want to do. Then the CBO scores it. If the score ends up showing that the likely consequences of the legislation will somehow be wildly different than the legislators intended, of course the score should be cause for revision. It’s possible, for example, that a given tweak to benefit eligibility for some program or other would turn out to be much more costly than anticipated.

But what we’ve instead tended to see happen is for legislators to start with an arbitrary scoring target, typically a round number — $900 billion, $1.3 trillion, whatever — and then start writing the bill. Then if the CBO comes back with a number that’s slightly different from the target — $907 billion, $1.3 trillion but it’ll take 126 months instead of 120 — they go back and re-write the bill for basically no reason. The problem here is that the target itself was totally arbitrary, and the forecast from the CBO is full of uncertainty. There’s no reason for Boehner to be putting forward a bill whose cuts are more front-loaded than he himself thought was desirable on Monday just because the CBO scores come out somewhat differently. But that’s on him, not on the CBO.

I don’t have a dog in this fight, but it’s always interesting to read about a new issue:

Here, the clash began this spring, when Gov. Mitch Daniels, a Republican, filled four empty slots on the board of the Indiana School for the Deaf, which was founded more than 165 years ago and promotes what it calls a bilingual, bicultural philosophy that includes American Sign Language and English. Some 340 students go to the school, which provides outreach services to hundreds of others.

Parents complained that three of the appointees were not themselves deaf. Two of the new board members (both of whom have a deaf or hard-of-hearing child) drew particular anger because families said they were dues-paying members of Hear Indiana and were perceived to favor an educational approach of amplifying sound and encouraging speech over sign language.

The appointments, they said, signaled that the state was now picking sides — against American Sign Language and deaf culture.

I know that hear in DC we’ve had a version of this controversy around Gallaudet University. In essence, technological methods of helping people to hear are improving and that’s tending to undercut the bases of support for traditional deaf language and culture. It’s not clear that Daniels actually intended to stumble into this contentious issue or was just looking for ways to slash spending and thought a 13 percent cut to the School for the Deaf’s budget sounded smart as a fiscal matter.

Tyler Cowen cites David Wessel who writes “What’s wrong with the American job engine? As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: ‘Sales have come back, but people have not.’” Cowen argues that this shows aggregate demand is being overrated as a source of labor market woes.

That makes a lot of sense, except sales haven’t come back:

If you compare sales (or any other measure of demand) today to where they were at the low point, then yes sales are back. Growth is back. But if you compare employment today to where it was at the low point, then jobs are back too. But sales are below trend. Demand is below trend. And employment is below trend. Needless to say, like all economies at all times throughout history there are also pro-growth structural reforms that could benefit the American economy. But just as “sales have come back, but jobs have not” would be a powerful argument that AD is overrated were it true, the fact that it’s not true surely has some force.

I went this morning for an off-the-record chat with Education Secretary Arne Duncan and some of the other key staffers at the Department of Education. They were mostly talking education policy (naturally) but what they were talking about shed an interesting window on the larger political dysfunction of the United States. Basically when the so-called “No Child Left Behind” version of the Elementary and Secondary Education Act was signed into law in early 2002, the expectation was that it would last for five years or so and be due for reauthorization and re-writing in 2007. It didn’t happen. And it didn’t happen in 2008 either. No biggie. Reauthorizations often don’t happen on schedule. Then when President Obama took office in 2009, he had large Democratic majorities in congress and a huge recession to deal with. So in addition to recovery measures, he emphasized an agenda that tended to unite his caucus and put ESEA reauthorization on the back-burner as something he was more likely to be able to get bipartisan support for.

So here we are in 2011, the year that was supposed to be the reauthorization year. Except it’s the end of July and we’re having a doomsday standoff over the debt ceiling. Then in September appropriations expire. Then next thing you know it’s the holidays and it’s re-election season. So while the administration still wants a proper re-write and re-authorization, nobody’s counting on it happening. Instead, the plan is to drive policy change by issuing “waivers.” Basically, the Secretary has the ability to grant conditional relief from the law’s requirements. And since the proficiency standards for Adequate Yearly Progress were set very (i.e., unrealistically) high, the waivers will be much in need. So the thinking is that rather than formally re-write the law, the administration will be able to say “well you get a waiver from this and that if you do this and that” and thus, in practice, federal education policy can change fairly dramatically without congress doing anything.

It’s clever, and since it’s probably not the kind of issue around which congress will organize a massive backlash (compare to, say, the EPA) it just might work. But it should also be taken as another sign of the increasing breakdown of our machinery of government.

I can think of a lot of reasons a country might have this kind of problem:

A major Bronx water supply line burst this morning just before 6:30 a.m., flooding Jerome Avenue for several blocks near 177th Street, halting traffic, disrupting subway and bus service, and damaging two nearby gas mains. The water flow was capped by 9:20 a.m., officials said. Speaking at a news conference, Mayor Michael R. Bloomberg said it was not clear why the pipe, which was installed in 1903, had burst. “It has been doing yeoman’s work, but unfortunately, after 108 years, it’s not,” he said.

What’s difficult to think is a good reason for the United States of America to have this problem. The United States can current sell five year bonds at a negative real interest rate. The United States has plenty of unemployed construction workers. Are we suffering from a metal shortage of some kind that makes it impossible to take advantage of cheap lending to hire construction workers to fix broken pipes? If so, I haven’t heard about it. Instead, we seem to be suffering from a shortage of effective political leadership. Not coincidentally, we’re talking about a rich, low-tax country that’s also the world’s military hegemon losing its AAA-rated bond status. Interesting times.

Via Jon Chait, the tooth fairy is cutting nominal wages:

According to a Visa survey, the Tooth Fairy is not immune to the slowed economy. With less money to go around, she’s doling out an average of just $2.60 per tooth this year, compared to $3 in 2010.

That said, by Kevin Drum’s calculations real earnings for kids who’ve lost a tooth are still way up from where they were approximately 30 years ago. I’d suggest that falling family size among middle class professional types is driving the trend. As kids become scarcer, each one can extract more resources from his or her parents.

“The Colonial Origins of the Divergence in the Americas: A Labour Market Approach” (PDF) extends the analysis I offered earlier today to conclude that in fact North America emerged as the richest place in the world as far back as the 17th century. They calculate “welfare ratios” that compare nominal wages in different places to the price of subsistence in that location. The higher the number, the more you can afford luxuries and such:

Part of a long-run project to put together a systematic database of prices and wages for the American continents, this paper takes a first look at standards of living in a series of North American and Latin American cities. From secondary sources we collected price data that—with diverse degrees of quality—covers various years between colonization and independence and, following the methodology now familiar in the literature, we built estimations of price indexes for Boston, Philadelphia, and the Chesapeake Bay region in North America and Bogotá, Mexico, and Potosí in Latin America exploring alternative assumptions on the characteristics of the reference basket. We use these indexes to deflate the (relatively more scarce) figures on wages, and compare the results with each other, and with the now widely known series for various European and Asian cities. We find that real wages were higher in North America than in Latin America from the very early colonial period: four times the World Bank Poverty Line (WBPL) in North America while only two times the WBPL in Latin America. These wages place the North American colonies among the most advanced countries in the world alongside Northwestern European countries and the Latin American colonies among the least developed countries at a similar level to Southern European and Asian countries. These wage differences existed from the early colonial period because wages in the American colonies were determined by wages in the respective metropoles and by the Malthusian population dynamics of indigenous peoples. Settlers would not migrate unless they could maintain their standard of living, so wages in the colonies were set in the metropole. Political institutions, forced labour regimes, economic geography, disease environments and culture shaped the size of the economy of each colony but did not affect income levels.

Reasoning backwards, crossing the Atlantic ocean to go from England to the proto-USA was an enormously costly and risky undertaking. Nobody would have done it unless the wages were higher. South America was colonized by poorer countries and had larger indigenous populations and thus a different dynamic. But again as I said before, the story of American prosperity isn’t a story about a poor country that used good policy to become rich. We’ve essentially always been a rich country and if there’s a policy issue it relates to continental europe’s failure to “catch up.”

John Sides notes that public opinion has turned more strongly opposed to extra-marital affairs over time:

My girlfriend’s theory about this, which makes sense to me, is that as women’s labor market opportunities have improved their dependency on husbands for economic security has declined and, in turn, their willingness to put up with misbehavior has gone down. Looking at a gender breakdown of responses might shed some light on this, but I can’t figure out how to work the General Social Survey website.

David Leonhardt’s last “Economic Scene” column is basically awesome, but as he rides into the sunset of his new Washington Bureauchiefdom, he did offer one offhand remark that I don’t think is quite right:

When it comes to economics, we know that a market economy with a significant government role is the only proven model of success. The United States has outgrown Europe partly because of our greater comfort with market forces. China and India boomed after allowing more of a market economy. On the other hand, unencumbered market forces often lead to disaster, as 1929 and 2008 made clear.

Here’s a chart Matt Cameron made based on Angus Maddison’s data (XLS). The definition of Western Europe here is Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, and the UK. The United States, it’s worth noting, was richer than most of these countries as far back as 1820. Presumably the reason we were so rich in 1820 is the same as the reason Australia was so rich in 1820—we were stealing valuable land from its indigenous occupants. And as you can see, the gap in per capita output long predates the emergence of the postwar welfare state.

The past 140 years worth of growth rates don’t display any consistent trend. You can make the case that anti-market public policies explain why Europe hasn’t converged on American per capita output. But I think it’s difficult to characterize the pre-1870 U.S. economy as primarily “comfort with market forces” as opposed to high tariffs, expropriation of Native American land, and chattel slavery. The interesting question is perhaps not why American outgrew Europe during this period, but why American outgrew Mexico, Peru, and Brazil. Daron Acemoglu, Simon Johnson, and James A. Robinson (PDF) “Reversal of Fortune: Geography and Institutions in the Making of the Modern World IncomeDistribution” is the closest thing to a persuasive argument I’ve seen on this score.

Even though paying a prostitute to have sex with you is a crime, Sen. David Vitter (R-LA) who’s confessed to having committed said crime, isn’t currently in jail. Nor has he ever served jail time, or been arrested, or stood trial. And as Rep. Zoe Lofgren (D-CA) writes, this makes it pretty rich for Senator Vitter to be upset about the fact that some unauthorized migrants to the United States aren’t being deported:

In the District of Columbia, it is a crime to engage in prostitution. In July of 2007, Ms. Deborah Palfrey, known as the DC Madam who had been convicted under this statute, published her phone records indicating that one of our witnesses was her client. Later Senator Vitter said this was a very sin in my past for which I am completely responsible. Under the DC criminal statute related to solicitation, the senator ninety to one hundred days but he never faced trial. In fact, prosecutors never brought charges. Sure looks like he benefited from prosecutorial discretion. I would not mention this incident today if it didn’t expose the hypocrisy of seeking to prevent the use of discretion to benefit others when one has enjoyed the benefit himself.

One important difference is that I think failing to arrest and try Vitter was a bad use of prosecutorial discretion. A trial for a powerful wealthy individual would have been an excellent teachable moment for the country to consider whether the current state of legislation around the exchange of sex for money really makes sense.

I’ve been in a few conversations with various people this week citing one strategy or another that they claim could have produced a “clean” debt ceiling increase and avoided the current legislative crisis. I basically agree with all these theories. Obama could have gotten a debt ceiling increase built into the December 2010 tax deal, and Obama could have simply demanded a clean debt ceiling increase and probably gotten one months ago. But I’m not sure this is a case of bad negotiating strategy or good negotiating strategy.

We’ve seen so much mockery of “11-dimensional chess” that I think people have gotten unduly reluctant to credit the idea that there’s a bit of regular old chess happening here where you have to think one or two moves ahead. In particular, if we had a clean debt ceiling increase, that wouldn’t change the fact that Republicans control the House and Republicans want spending cuts. All that would happen is we’d roll into September, when the current set of discretionary appropriations are set to expire, with Republicans demanding that any new appropriations deal feature spending caps, entitlement cut commissions, etc. In other words, the fight we’re having in July would be happening in September. I think reasonable people can disagree as to whether having the fight now is better than having the fight then, but I don’t think it’s by any means crazy for the White House to suppose that the current timing is more favorable to the progressive side or crazy to believe that they did, in fact, see two moves ahead and decide they preferred this outcome.