Why I Am More Optimistic About Money-Financed Expansionary Fiscal Policy than About Quantative Easing

What David Beckworth misses is that if quantitative easing is used to fund expansionary fiscal policy–if the government buys not long-term Treasury bonds but, rather, bridges and NIH research and the human capital of twelve-year olds–then those asset purchases are going to be permanent: you cannot unwind those transactions. Hence, by Beckworth’s logic, that policy will be effective.

Or, at least, it might be:

David Beckworth: Macro and Other Market Musings: The Wrong Debate: Helicopter Drops vs. Quantative Easing:

The key… is that some portion of the monetary base expansion is expected to be permanent. If the public believes the Fed’s asset purchases are not going to be permanent and therefore the price level and nominal income will not be permanently higher, the rebalancing will not take place. I bring this up because this same point applies to helicopter drops or any other kind of fiscal policy stimulus. Yet many of my fiscalist friends miss it. They seem to think that helicopter drop will solve the excess money demand problem, period. That is not the case if the Fed continues to hit its inflation target. Imagine, for example, that Congress approved a $10,000 check be sent to every household. Even in a non-Ricardian world where households are liquidity- and credit-constrained, the increased private sector spending created by the checks would be offset by monetary policy if it started to push inflation above its target…

As I see it, some economists are dubious about quantitative easing but enthusiastic about expansionary fiscal policy. Others believe that expansionary fiscal policy is vulnerable to various forms of crowding-out but see quantitative easing as a magic bullet. Few are pessimistic about both. So why not do both? The good part does good, and the not-good part does little harm in both conceptual universes. And doing both is a monetary expansion-financed fiscal stimulus…