Thursday, January 10, 2013

Follow-up on the scrip option

Courtesy of David Kamin, I note some additional issues that the use of scrip might raise. Both as a legal matter and in practical terms (especially for people who are cash-constrained), scrip is not quite the same as cash. Thus, while offering it is probably better than just not paying people, its use would still pose such problems as the following:

--Paying off bonds with scrip would still technically be default. So cash would still be used for that, and also perhaps for various other purposes. So the Treasury would still be prioritizing payments, raising both political and legal issues as well as that of technical feasibility (the computer systems problem).

--It's up to the mysterious wisdom of the bond markets, even if bondholders still get cash, to what extent the use of scrip to pay amounts that were legally due in cash avoids weakening our reputation as a reliable borrower.

--People who are relatively poor and/or cash-constrained would especially face the non-cash equivalence problem.  Beyond merely earning zero interest if they just hold onto it (which of course is equally true of cash), they might be hit with a steep discount if they tried to sell or deposit it. This would not merely raise distributional concerns, but might also have a macroeconomic impact on consumer spending - again, if one compares it to finding a way for the government to keep paying out cash, rather than to just doing nothing.

In sum, I certainly agree that using scrip is both (a) likely to be much better than just doing nothing and (b) worth considering as perhaps the ultimate best course to follow.  But given these downsides, it is not necessarily the best option.  I myself still tend to favor the platinum coin, although ultimately this is an empirical question (turning on how the various alternatives would in fact play out, economically and politically) to which I cannot claim to know the answer.


Unknown said...

I had a heated email debate with Ed Kleinbard last night along the same lines. He seemed convinced that the coin was unconstitutional whereas scrip would pass legal muster. Not being a lawyer, I deferred, but glad that you see the issue as being as murky as I do. I really hate all the options of Congress does not raise the debt limit.

Daniel Shaviro said...

I haven't discussed with Ed his problems with the platinum coin option. Obviously there's the optical question, but I don't know what his legal objection is. I also suspect that he is relying on the fact that scrip worked out kind of OK in California. But in the federal setting the stakes are higher and the playout would not necessarily be the same.

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