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

Posted on by Brad DeLong

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.

Must-Read: Willem Buiter: EU and China Ought to Use Helicopter Money

Posted on by Brad DeLong

Must-Read: Willem Buiter: EU and China Ought to Use Helicopter Money:

Helicopter money is a coordinated monetary and fiscal stimulus…

It is a fiscal stimulus funded permanently by the Central Bank. There are obvious win-win situations that we could have. Restructuring of debt if possible, haircuts if necessary, and then a well-targeted fiscal stimulus funded ultimately through the European Central Bank (ECB), people’s helicopter money….

The Central Bank itself provides a fiscal stimulus by sending checks to every man, woman, and child of the country…. In a country like Germany where infrastructure investment is needed, the government announces and implements a large-scale investment program and indirectly sells the debt to fund this program to the central bank, which monetizes it…. [China needs] fiscal stimulus targeted mainly at consumption, not at investment. Some capital expenditure like social housing, affordable housing, even some infrastructure. But organization supporting infrastructure, not high-speed trains in Tibet. It has to be funded by the central government, the only entity with deep pockets, and it has to be monetized by the People’s Bank of China…

Must-Reads: July 30, 2016

Posted on by Brad DeLong

Should Reads:

Weekend reading: “How many Big Macs will that minimum wage buy?” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Weak U.S. productivity growth has been one of the most troubling trends since the Great Recession. Is it just a coincidence that productivity has been weak since the crash? Or did the recession have an impact?

The conventional wisdom about encouraging entrepreneurship is that policymakers should increase the return to starting a business. But increasing evidence shows that we should be concerned about reducing the cost of a failing business as well.

The permanent income hypothesis is an important tool for thinking about how people react to drops or boosts to their income. The idea, however, has some flaws and doesn’t hold up for the entire U.S. population.

With the policy conversation centered on proposals to raise the minimum wage to rates unseen in the United States, it’s hard to tell how such an increase would play out in the United States. New School economist and Equitable Growth grantee David Howell takes a look at the international data for answers. And Bridget Ansel pulls out some of the key graphs and takeaways from Howell’s brief.

Links from around the web

The Federal Reserve kept U.S. interest rates steady at its most recent meeting this week. Ylan Mui writes that the central bank is coming around to the view that U.S. economic growth in the future will be much weaker than it previously thought. [wonkblog]

Because the Federal Reserve has kept U.S. interest rates so low for so long, some economists have thrown out the idea that low interest rates are causing low inflation despite the established view that low interest rates increase inflation. Noah Smith reports on a new paper that tries to settle the question that has quite interesting results. [bloomberg view]

Speaking of unconventional monetary policy, the prospect of “helicopter money” becoming a real world policy is starting to sink in among economists and policy analysts. Neil Irwin gives some background on the idea. [the upshot]

How important is the U.S. government to economic growth and economic policy writ large? Mike Konczal reviews two books on the topic with very different opinions on the matter. [boston review]

“Red tape no doubt prevents some firms from making growth-boosting investments. But bigger gains might come from creating an economy in which firms found themselves needing to compete to attract workers.” Ryan Avent writes on the increase evidence that economic sclerosis in high-income countries is related to inequality and insufficient demand. [the economist]

Friday figure

Figure from “The employment effects of a much higher U.S. federal minimum wage: Lessons from other rich countries” by David Howell

The Federal Reserve: I Repeat Myself

Posted on by Brad DeLong
Real Gross Domestic Product FRED St Louis Fed

I repeat myself: to begin a tightening cycle and a process of interest-rate increases in December 2016–in fact, to announce in mid 2014 the end of further moves toward monetary expansion and a bias toward tightening as soon as it is not grossly imprudent–requires that one place only an infinitesimal weight on:

  1. Bond market very pessimistic long-run expectations.
  2. The asymmetry in policy responses and thus in risks created by the zero lower bound on short-term safe nominal interest rates.

I have been asking for quite a while now why any FOMC would choose to place such an infinitesimal weight not on just one but on both of these considerations. I have not gotten an answer from anywhere. I would like one. Very much…

What More Has to Happen Before the Fed Concludes That This Looks Like Yet Another Failed Interest-Rate Liftoff?

Posted on by Brad DeLong
Real Gross Domestic Product FRED St Louis Fed

If you had told the Federal Reserve at the start of last December that 2015Q4, 2016Q1, and 2016Q2 were going to come in at 0.9%, 0.8%, and 1.2%, respectively, a rational Fed would not only have not raised interest rates in December, they would have announced that they would not even think of raising interest rates until well into 2017, and they would have started looking for more things they could do that would safely boost demand.

So why is the FOMC now not cutting interest rates back to zero? I mean, what more has to happen before the balance of probabilities says that this is likely to be yet another failed liftoff of interest rates?

Must-Read: Ananya Roy: In Defense of “Poverty”

Posted on by Brad DeLong

Must-Read: Ananya Roy: In Defense of “Poverty”:

A glimpse of the public assistance bureaucracy that the poor must navigate….

Despite being fluent in sophisticated understandings of poverty and inequality, the… middle-class social justice professionals were thoroughly disoriented by the sheer dehumanization…. Shunted from office to office, in search of basic paperwork, trying to meet convoluted criteria of eligibility, we the privileged… were reminded that we are not poor and that we barely understand the lived condition of poverty. That lived condition, in the United States, is necessarily and persistently racialized…. This history did not start with the Great Recession or even with the era of neoliberalization. It is the long history of racialized expropriation and quarantine. I worry that a general narrative of inequality elides both the specificity of poverty and the distinctive history of impoverishment…

Must-Read: Olivier J. Blanchard and Lawrence H. Summers (1986): Hysteresis and the European Unemployment Problem

Posted on by Brad DeLong

Must-Read: Olivier J. Blanchard and Lawrence H. Summers (1986): Hysteresis and the European Unemployment Problem:

European unemployment has been steadily increasing for the last 15 years and is expected to remain very high for many years to come….

We argue that this fact implies that shocks have much more persistent effects on unemployment than standard theories can possibly explain. We develop a theory which can explain such persistence, and which is based on the distinction between insiders and outsiders in wage bargaining. We argue that if wages are largely set by bargaining between insiders and firms, shocks which affect actual unemployment tend also to affect equilibrium unemployment. We then confront the theory to both the detailed facts of the European situation as well as to earlier periods of high persistent unemployment such as the Great Depression in the US.

Must-Read: Michael Kalecki (1943): Political Aspects of Full Employment

Posted on by Brad DeLong

Must-Read: Michael Kalecki (1943): Political Aspects of Full Employment: “Most economists are now agreed that full employment may be achieved by government spending…

…There is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic…. The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending… [are]: (i) dislike of government interference in the problem of employment as such; (ii) dislike of… public investment and subsidizing consumption… (iii) dislike of the social and political changes resulting from the maintenance of full employment….

Capitalists [have] a powerful indirect control over government policy: everything which may shake the state of confidence… [might] cause an economic crisis…. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence…. The dislike of business leaders for a government spending policy grows even more acute when they come to consider the objects on which the money would be spent…. Public investment… be confined to objects which do not compete with the equipment of private business… suits the businessmen very well. But the scope for public investment of this type is rather narrow….

The maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. The ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow…. ‘Discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system…

http://delong.typepad.com/kalecki43.pdf