Must-Read: Paul Krugman (2013): Helicopters Don’t Help

Must-Read: A piece from Paul Krugman three years ago that I put aside to think about because I didn’t really understand what argument he was trying to make. I am pulling it out again because I was reading Adair Turner.

Adair, seeking supporters for his advocacy of helicopter money, recruits as authority number one Ben Bernanke. That’s great!

He then recruits as authority number two… me. That’s not so great. There ought to be somebody of more weight and reputation–and intelligence–on the pro-helicopter money side. I wish I could do something to boost my reputation overnight (my weight is already more than high enough, thank you very much). But I can’t. So all I can do is to try to become more intelligent, and think smarter thoughts about helicopter money. So the first question is: what argument am I (and Ben, and Adair) making?

Paul Krugman (2013): Helicopters Don’t Help:

David Beckworth has a good piece on… the irrelevance of the decision to finance budget deficits by printing money as opposed to selling bonds…

In case 1, the government runs a budget deficit, which it finances by selling bonds…. At the same time, the central bank… buy[s] bonds from banks with newly created monetary base. I think we’re all agreed that the second part of this story isn’t very effective in a liquidity trap; the limitations of QE are why we’re even talking about helicopter money.

But now consider case 2, in which the government pays for deficits simply by “printing money”, that is, adding to the monetary base. How do these cases differ?… You may say that… you wanted an increase in government spending financed by the printing press. But why couldn’t you do that same increase in spending financed by bonds that the central bank promptly buys back?…

It’s the spending increase, not the printing press, that does it. As Voltaire said, you can kill sheep with witchcraft if you also feed them arsenic….

What you need to get monetary traction, as I pointed out long ago (and for the record, I do think I was the first to make this point) is to convince everyone that the monetary base will stay larger — to credibly promise to be irresponsible. The only way I can make sense of the call for helicopter money is to argue that for some reason the institutional setup — having the central bank finance the government directly — makes it less likely that the central bank will snatch away the punchbowl later. But that’s a very different argument from the one the helicopter advocates seem to be making.