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4 Ways to Change the Fed

November 3, 2011

Our friend beowulf has been in contact with one of the members of Senator Bernie Sanders Fed reform group.  He has sent the letter below full of suggestions to this person.

It’s an astonishing document.

These proposals are all “doable” in that existing law provides a framework to accomplish them.  New laws need to be passed, but  the fearsome beowulf has outlined just what needs to be changed.  (And Wow! Incredible work.)

Update: Want the easy version?  Go here for the easy version.   

The proposals have each been “vetted” by the MMT community, at least in part.  I was particularly glad to see the payroll tax holiday proposal.  I’ve changed my mind on the Platinum Coin and think it is a very good idea.

Then, even small movements in the direction of any of these proposals will make life in the U.S. better.

Some Notes:

The Platinum Coin idea doesn’t even need to be adopted for it to be useful!  This idea by beowulf and Letsgetitdone is so powerful that it doesn’t even need to be adopted for it to change how we do the business of money creation in the United States.  Once people “get it”, it’s nearly as good as issuing the coin itself! Tell your friends, tell your family.  Beo is telling a Senator!

The payroll tax holiday could be expanded to include inflation.  I’d probably do so, and include a ratchet function within the acceptable rate of inflation.   But there are other ways to address cost-push inflation, too. Discuss.

The Fed/Treasury swap Idea seems…far fetched.  It’s a big change.  But I am a huuuuuggge fan.  It makes it clear what the functions should be for each institution. I like to know we’re pushing the argument in this direction. It’s all about the idea space.

The Fed and fed banks under the direction of the Treasury secretary is a no-brainer.  I am surprised it hasn’t happened yet and this could easily get support from both sides of the isle.  Beowulf points out:  “…It’s difficult to argue that the person we entrust with nuclear launch codes can’t also be trusted to not blow up the currency.”

Here is the letter:

I’ve listed below possible legislative language to 1. place Fed under Tsy control, 2. authorize Tsy to issue US Notes to fund spending and the Fed to issue debt obligations to control interest rates, 3. Use coin seigniorage to offset budgetary costs of net interest, trade deficit and an automatic payroll tax holiday system, and 4. an automatic payroll tax holiday system (naturally).   As I suggested last week, Sen. Sanders would do well to allocate any budgetary savings to new spending lest it simply be saved up for future tax cuts.  I’ll attach what’s written below as an rtf file that includes links.
….

Putting Fed (both FRB and the regional Banks)  under control of the Secretary of the Treasury

Section 246 of Title 12, United States Code,  is amended by striking the words ‘agent appears to conflict with the powers of the Secretary of the Treasury’ and replacing with the following:  ‘banks is exercised’.

Tsy and the Fed swap jobs, with Tsy creating the dollars it needs to spend and the Fed issuing the bonds it needs to control interest rates 

Section 5115 of Title 31, United States Code, is amended by striking subsection (b) and inserting, after subsection (a),  the following: “(b) The Secretary of the Treasury may in his discretion deposit United States currency notes, in paper or electronic form,  in the general fund of the Treasury as necessary to issue warrants for money drawn on the Treasury consistent with appropriations.”

Section 248, Title 12, United States Code is amended by inserting, after subsection (r ), the following: “(s) Authority to issue obligations (1) The Board is authorized, with the approval of the Secretary of the Treasury (“Secretary”), to issue publicly and have outstanding obligations of such amount, having such maturities and bearing such rate or rates of interest as may be determined by the Board.  Such obligations may be redeemable at the option of the Board before maturity in such manner as may be stipulated therein. So far as is feasible, the debt structure of the Board shall be commensurate with its asset structure. (2) The Board is also authorized to issue its obligations to the Secretary and the Secretary may in his discretion purchase or agree to purchase any such obligations. The Secretary may sell, upon such terms and conditions and at such price or prices as he shall determine, any of the obligations acquired by him under this subsection. (3) Obligations of the Board issued pursuant to this section shall be lawful investments, and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority or control of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States, or any agency or instrumentality of any of the foregoing, or any officer or officers thereof.”

If the Fed needs a revenue source to pay interest on its obligations (language above taken from Federal Financing Bank statute), the Fed already has the authority to levy and adjust its transaction fees.

Subsection (c) of Section 248a, Title 12, United States Code is amended by inserting, after subsection (4), the following: “(5) schedule of fees may be adjusted, in whole or part, to pay interest on obligations issued by the Board.”

US Notes are exempt from the debt ceiling (“Total Public Debt Subject to Limit is defined as the Total Public Debt Outstanding less the Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued before 1917, and old currency called United States Notes as well as Debt held by the Federal Financing Bank…“).
Platinum coins redux

There was a recent Tea Party-backed House bill  (HR 2977) introduced recently  that sought to to replace dollar bills with dollar coins.  The bill”s section (d) would put coin seigniorage profits on-budget, which is actually a wonderful idea.  That could mean (to extend the principle) that  a payroll tax holiday wouldn’t add to the deficit so long as seigniorage proceeds equal to the “tax holiday transfer of funds” were deposited in TGA every year.  Likewise, the demand leakage created by our chronic $600B trade deficit could be offset without increasing the budget deficit or imposing trade barriers. Where I take the Tea Party bill in an unexpected direction begins with “The total deposits”.

The ninth proviso of section 5136 of title 31, United States Code, is amended by inserting, after ‘miscellaneous receipts’ the following: “and such amount shall be included as an estimated receipt of the Government and a receipt of the Government under paragraphs (6) and (7), respectively, of section 1105(a) in any budget submitted under such section.  The total deposits of said miscellaneous receipts each year shall be no less than the annual sum of Secretary’s estimates of Tax Holiday Transfer of Funds, Net Interest and Trade Deficit.”

Between replacing debt service costs with US Notes and/or rebating back net interest with coinage, uncapping SS FICA (see below) and offsetting the cost of the trade deficit, theres’s more than enough revenue to fund Sen. Sanders’s universal healthcare bill without raising taxes or increasing the deficit (of course a tax increase combined with a tax holiday, it could actually be a net decrease, see “unearned income Medicare contribution” below).   Note, including net interest isn’t  necessary if Tsy and Fed actually did swap jobs; also, trade deficit could be replaced by OMB’s similarly sized (just shy of $600B), Total Investment Outlays for Major Physical Capital, Research and Development, and Education and Training (Table 9.1 in President’s Budget).

————

Adjustable payroll tax holiday

Chapter 21, Title 26, United States Code is amended by inserting. after Section 3128, the following:

“3129. PAYROLL TAX HOLIDAY.

(a) Tax Holiday Transfer of Funds-

‘(1) IN GENERAL- There are hereby appropriated  to the Social Security and Medicare trust funds, out of money in the Treasury not otherwise appropriated, an amount equal to the reduction in FICA taxes described by subsection (b).‘(2) ALLOCATION AMONG FUNDS- Amounts shall be appropriated to such funds under paragraph (1) in the same proportions as amounts would (but for this section excepting subsections (f) and (g)) be appropriated to such funds under the Social Security Act and the Railroad Retirement Act of 1974.

(b) Reduction in Payroll Taxes-

‘(1) IN GENERAL- The rate of each FICA tax for each quarter (determined without regard to this section excepting subsections (f) and (g)) shall be reduced by the number of percentage points equal to–

‘(A) such rate, multiplied by‘(B) the tax holiday percentage determined by the Secretary of the Treasury for such quarter.

‘(2)  TAX HOLIDAY PERCENTAGE-   The tax holiday percentage shall be Secretary of the Treasury’s estimate of  U3 unemployment rate, reduced by 2.5 percentage points, the resulting percentage then multiplied by ten. The tax holiday percentage shall not exceed 100%  (10).  FOR EXAMPLE, if U3 rate is estimated to be 10%, it is first reduced to 7.5%, then multiplied by 10 to derive 75% as the current quarter’s payroll tax holiday percentage.

(c ) Upon enactment of this Act, the Secretary of the Treasury shall notify employers of tax holiday percentage for each quarter in any manner as the Secretary deems appropriate.

(d)  Definitions- 

‘(1) FICA TAX- The term ‘FICA tax’ means–

‘(A) the tax imposed by section 3101 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3201 as is determined by reference to the tax imposed by section 3101),‘(B) the tax imposed by section 3111 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3221 as is determined by reference to the tax imposed by section 3111, and‘(C) the tax imposed by section 1401 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3211 as is determined by reference to the taxes imposed by sections 3101 and 3111).

‘(D) the tax imposed by section 1441 of the Internal Revenue Code of 1986.

‘(2) SOCIAL SECURITY AND MEDICARE TRUST FUNDS- The term ‘Social Security and Medicare trust funds’ mean–

‘(A) the Federal Old-Age and Survivors Insurance Trust Fund established by section 202 of the Social Security Act, ‘(B) the Social Security Equivalent Benefit Account established under section 15A of the Railroad Retirement Act of 1974. and                         

‘(C ) the Federal Hospital Insurance Fund established by section 1817 of the Social Security Act.

(e) Determination under subsections (a) and (b) shall be made on the basis of estimates by the Secretary.  Proper adjustments shall be made to the extent prior estimates were in excess of or less than more accurate amounts.

(f)  Eliminating Social Security FICA Cap and high-wage Medicare surcharge

(1) Subsection 3121(a) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 1. 

(2)  Subsection  1402(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 1.

(3)  Subsection 3101(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 2.

(4)  Subsection 1401(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 2.

(g) Conforming unearned income Medicare contribution rate to standard FICA rate-

(1)  Subsection 1441(a)(1) of the Internal Revenue Code of 1986 is amended by striking the words “3.8 Percent” and replacing with the following: “15.3 percent”.

‘(2)  Subsection 1441(a)(2) of the Internal Revenue Code of 1986 is amended by striking the words “3.8 Percent” and replacing with the following: “15.3 percent”.”                  

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Categories: Main
  1. beowulf
    November 3, 2011 at 10:29 am

    Thanks for the kind words TC. Mike Norman linked to this Huffpost posting by Sen. Sanders.

    “The Veil of Secrecy at the Fed Has Been Lifted, Now It’s Time for Change”
    http://www.huffingtonpost.com/rep-bernie-sanders/the-veil-of-secrecy-at-th_b_1072099.html

    • November 4, 2011 at 8:18 am

      fabulous as always beowulf!

      to go along with clonal antibody’s comment re the alternative banking working group (which yves of nc is attending). would you consider posting your recommendations there as well? here is the link to add new group documents:

      http://www.nycga.net/groups/alternative-banking/docs/

      • Clonal Antibody
        November 5, 2011 at 10:45 pm

        Selise,

        I have uploaded Beo’s proposal to the Alternative Banking Docs

        Beo,

        Could you please look it over, and see that it is complete, and correctly copied.

        • November 6, 2011 at 9:59 am

          thank you!

        • beowulf
          November 6, 2011 at 5:50 pm

          Looks great, there’sjust one typo that’s (indirectly) your fault. :o)
          http://traderscrucible.com/2011/11/02/the-twisted-morality-of-saving-part-of-someones-bank-loan/#comment-1933

          Following our discussion in previous thread where you queried what would happen if unemployment exceeds 12.5%, I added a sentence in (b)(2), “The tax holiday percentage shall not exceed 100%”. I left in an extraneous “(10)” that is no longer following “ten”. If you could cut the parenthetical, all would be right in the forest. :o)

          To sum it up in a sentence, Treasury could cut everyone’s taxes if it spent its own money and left the Fed to lend for itself.

  2. Clonal Antibody
    November 3, 2011 at 5:21 pm

    I have put this up for discussion at the Alternative Banking group of the #Occupy NY General Assembly

  3. Dan Kervick
    November 4, 2011 at 9:18 am

    This is exciting stuff Beowulf. Great job in plowing through all that statutory code and turning policy ideas into concrete suggestions! The idea of having Fed and Treasure “swap jobs” is fascinating.

    A few weeks ago, I posted a proposal for Fed reform and macroeconomic policy reform on Mike Konczal’s blog. (And I also sent the link to an MMT blogger.) If anyone has the time to look it over, I would certainly appreciate their feedback.

    http://rortybomb.wordpress.com/2011/10/13/occupy-wall-street-monetary-policy-and-the-federal-reserve/#comment-19105

    And if you have comments you don’t want to post here, I can be reached at dkervick@comcast.net.

    • beowulf
      November 4, 2011 at 10:53 am

      Thank you Dan. In fact, the Fed might actually go for a job swap.
      Federal Reserve Bank of San Francisco President Janet Yellen [now Fed vice-chair] said the central bank wants authority to issue its own debt, a move that would bolster its efforts to raise interest rates as the credit crisis abates. The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system…
      http://www.bloomberg.com/apps/news?sid=a7SvA7m.nd78&pid=newsarchive

      As for your macro policy reform, I like the idea of a “fiscal Fed board”, it’d be a solid economic reform, but the roadblock is politics. I’m doubtful Congress would ever delegate away that much discretion over fiscal policy. The best case scenario, IMO, is for Congress to establish a fiscal policy formula (like the one for a tax holiday percentage above) that doesn’t give Tsy discretion but does allow it to to react to changing conditions. To analogize, paramedics are authorized to perform tasks off a medical algorithm checklist that, otherwise, only doctors are allowed to do.

      • Dan Kervick
        November 4, 2011 at 11:23 am

        What if the Monetary Policy Board were a Congressional office or committee of some kind?

        • beowulf
          November 4, 2011 at 11:52 am

          The Constitution would trip you up in one of two ways… if you call it an exercise of executive power, then its a violation of Separation of Powers (Art II of the Constitution begins, “The executive power is vested in a president of the United States of America”. The President can delegate it to civil officers he appoints but he can’t delegate it to legislators). If you call it an exercise of legislative power, then it violates the Presentation Clause (which begins, “Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a law, be presented to the President of the United States…). In other words, Congress can only act when both Houses of Congress agree, subject to a presidential veto.

          Your original idea actually is constitutional… IF Congress would agree to it. However, the last time an executive branch agency suggested something like this (the National Resources Planning Board in 1943), Congress promptly abolished the agency.
          http://www.nakedcapitalism.com/2011/06/matt-stoller-cato-%e2%80%93-privatization-deals-are-fraught-with-peril.html#comment-408744

        • TC
          November 4, 2011 at 11:56 am

          beo: Do you have a team of researchers working 24/7?

  4. beowulf
    November 4, 2011 at 2:02 pm

    Just me and the Ukrainian au pair.

    • TC
      November 4, 2011 at 5:22 pm

      🙂

  5. November 4, 2011 at 11:44 pm

    Beowulf, Great piece. I’d love to see it passed. I think TC’s discussion of it above is very good too. Has it spread to other MMT sites yet?

    Any feedback from Bernie?

  6. TC
    November 7, 2011 at 12:25 pm

    One minor change. The payroll tax holiday percentage should be “quantized” to multiples of 10% It shouldn’t be allowed to be 63%. It should be either 60% or 70%.

    Just to make the numbers easier to calculate for people.

    So the language would be:

    The tax holiday percentage shall be Secretary of the Treasury’s estimate of U3 unemployment rate, reduced by 2.5 percentage points, the resulting percentage then multiplied by ten, then rounded upwards to the nearest 10%. The tax holiday percentage shall not exceed 100% (10). FOR EXAMPLE, if U3 rate is estimated to be 10%, it is first reduced to 7.5%, then multiplied by 10, and rounded upwards to the nearest 10% to derive 80% as the current quarter’s payroll tax holiday percentage.

  7. beowulf
    November 7, 2011 at 2:27 pm

    “The payroll tax holiday percentage should be “quantized” to multiples of 10% It shouldn’t be allowed to be 63%. It should be either 60% or 70%.
    Just to make the numbers easier to calculate for people.”

    You could sure, but since everyone would just use a calculator anyway, an employer with, say, a $10,000 FICA tax payment due (at baseline rate) can just as easily subtract 63% as he can 60%.
    But that brings up the great political weakness of counter-cyclical tax policy– its always been easier to cut taxes in bad times to speed up the economy than its been to raise taxes in good times to slow it down. You definitely want employees to see their FICA taxes owed but for the tax holiday formula spelled out on each pay stub. As the economy improves, you want workers to view the increased FICA withholdings as a tax holiday reduction instead of a tax increase.

  1. November 7, 2011 at 3:21 pm
  2. January 2, 2012 at 9:14 am
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