Monday, July 25, 2011

How to Solve the Debt "Crisis"

I'll let you in on a little secret---there is no debt crisis.

What?!?! Then, what is all the noise about? If Congress doesn't pass a deal, the US will default on its debt and all hell will break loose.

Well, I'll admit that is one interpretation of what can happen, but most political "experts" seem to think that is the only interpretation. In fact, the "crisis" results from Congress providing contradictory instructions, on one hand requiring a certain level of spending, on the other neither providing the necessary revenues nor debt issuing authority to match those prescribed spending levels. The job of the US executive branch is to execute the instructions of Congress. But, in this case, that is impossible. The executive branch cannot follow the instructions of Congress, so it must do something reasonable. The two main choices are (1) default on bonds while cutting Social Security, Medicare and other payments, or (2) keep issuing debt. The first choice will create a shock, both to those who depend on payments from the US government, as well as to those who hold US debt. The second choice will be met with all the drama of an inchworm moving across a deck railing---snore.

Former President Clinton says that he would choose option #2. Who wouldn't? Yet, Obama and Geithner have ruled out this option. Presumably, they have made this declaration for negotiating purposes---the Republicans are less willing to negotiate if Obama is standoffish. Option #2 even has explicit legal backing. The 14th amendment clearly states that US debt shall not be questioned. This debt was created when Congress issued instructions creating a gap between spending and revenue. So, there is little reason to stop selling bonds unless one wants a true crisis.

Saturday, July 2, 2011

Ethanol Sanity

Finally!  The US Senate recently voted to end ethanol subsidies and tariffs.  The Economist says that the subsidies cost the government $1.78/gallon.  This for a fuel that is less energy-dense than gasoline and barely more environmentally friendly.  The problem is that the US largely produces corn-based ethanol.  The process of converting corn to ethanol requires significant resources and releases significant amounts of carbon dioxide. The tariffs were designed to keep out Brazilian sugar-based ethanol.  But, production of sugar ethanol is much more efficient and environmentally friendly, requiring fewer resources and producing less carbon dioxide per gallon of ethanol produced.  So, for decades (since 1980), the US has been using subsides & tariffs to damage the environment.  It's like subsidizing the purchase of SUVs (!)  It sounds like the budget and debt limit crisis has finally brought at least the Senate to its senses.  I hope such sanity prevails in the House and the US can finally do away with this ridiculous waste of money and environmental harm.

As an added bonus, eliminating these subsidies/tariffs should reduce food inflation pressures in the US since farm land which was being used to produce corn ethanol will now be available to produce corn foodstuffs.