The scramble for ideas to avoid the federal debt limit continues, and while a $1 trillion platinum coin may be the best-least-likely option, an example from America’s west coast might offer the best route out of a crisis. After all, if you want to know about budget crises, you should ask California, where fiscal gridlock is a way of life.
UCLA Law Professor Edward Kleinbard has written up a working pitch for a proposal we’ve mentioned before: Should the government be unable to issue debt after Feb. 15, the earliest date that the Treasury is expected to run short of cash, it could issue IOUs to pay its Congressionally-mandated bills. This scrip wouldn’t pay interest, but would be redeemable for cash, eventually, and would be tradable by financial institutions. Everyone from government employees to social security beneficiaries might end up getting paid with this third-way replacement of cash and bonds.
The idea is modeled on what happened in California in 2009 under Governor Arnold Schwarzenegger, when the state ran short of cash during a recession-driven fiscal impasse. Kleinbard explains:
Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.
Whether as a result of public shaming, pressure from banks or a newfound sense of responsibility, the legislature quickly worked out a budget deal and the scrip was then redeemed for cash.
Throughout the ordeal, California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.
In the case of the federal government, deploying scrip would avoid the potential for a constitutional crisis, if the executive branch attempts to invalidate the statutory prohibition on borrowing with the fourteenth amendment; it would be simpler and easier to explain than a platinum coin; and it would avoid the recessionary effects of sudden spending cuts and the financial chaos of a default on America’s existing debt. And while it isn’t a feasible long-term solution, it could buy the time needed for a more reasonable solution.