Tag: Helicopter Money

Helicopter Money: When Zero Just Isn’t Low Enough: Milken Review

Posted on by Brad DeLong

At Milken Review: Helicopter Money: When Zero Just Isn’t Low Enough: If you pay much attention to the chattering classes — those who chatter about economics, anyway — you’ve probably run across the colorful term “helicopter money.” At root, the concept is disarmingly simple. It’s money created at the discretion of the Federal Reserve (or any central bank) that could be used to increase purchasing power in times of recession. But the controversy over helicopter money (formally, money-financed fiscal policy) is hardly straightforward… Read MOAR at Milken Review

The Stakes of the Helicopter Money Debate: A Primer

Posted on by Brad DeLong

The swelling wave of argument and discussion around “helicopter money” has two origins:

First, as Harvard’s Robert Barro says: there has been no recovery since 2010.

The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come down primarily because people who were unemployed have given up and dropped out of the labor force. Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the small increase in the share of people with jobs has been neutralized, as far as its effects on how prosperous we are, by much slower productivity growth since 2010 than America had previously seen, had good reason to anticipate, and deserves.

The only bright spot is a relative one: things in other rich countries are even worse.

The wave’s second origin comes in an institutional change that took place in rich countries around the year 1980, back in the era in which Paul Volcker took control of the Federal Reserve. Back then we changed our economic policy institutions. The stagflation of the 1970s convinced many that the political branches of government were incompetent at managing the business cycle. The business cycle disturbed inflation, unemployment, and short run growth. The political branches had tried to use the tools they controlled to manage the business cycle. The stagflation of the 1970s convinced many that they had failed and could not but fail. And the stagflation of the 1970s also convinced the political branches that they did not want responsibility for managing the business cycle—that to assume responsibility was to accept blame, because it would go badly.

Thus back in 1980 Paul Volcker grabbed for the Federal Reserve the power they released. Henceforth the Federal Reserve—and its kith and kin central banks elsewhere in the world—were to be “independent”: They were to be effectively freed from meddling by vote seeking politicians with or seeking soundbites. They were tasked be good technocrats finding a way for the economy between the Skylla of inflation and the Kharybdis of unemployment. And thus they were to manage the economy generate stable, satisfactory, and equitable growth.

But could the Federal Reserve and its kith and kin elsewhere do the job? Did they have the tools? Volcker’s view, and the consensus view of mainstream economists, was that they did have the tools: Milton Friedman had demonstrated, to the satisfaction of a rough consensus of mainstream economists, that central banks’ powers to create money with which to conduct financial open market operations and to both supervise and rescue the banking system were more than powerful enough to do the job.

Now note that back in 1936 [John Maynard Keynes had disagreed][]:

The State will have to exercise a guiding influence… partly by fixing the rate of interest, and partly, perhaps, in other ways…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself…. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative…

By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus of mainstream economists at least, that Keynes had been wrong and Friedman had been right.

But in the aftermath of 2007 it became very clear that they—or, rather, we, for I am certainly one of the mainstream economists in the roughly consensus—were very, tragically, dismally and grossly wrong.

Now we face a choice:

  1. Do we accept economic performance that all of our predecessors would have characterized as grossly subpar—having assigned the Federal Reserve and other independent central banks a mission and then kept from them the policy tools they need to successfully accomplish it?

  2. Do we return the task of managing the business cycle to the political branches of government—so that they don’t just occasionally joggle the elbows of the technocratic professionals but actually take on a co-leading or a leading role?

  3. Or do we extend the Federal Reserve’s toolkit in a structured way to give it the tools it needs?

Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly seek to choose door number (1)—and then to tell us that the “cold douche”, as Schumpeter put it, of unemployment will in the long run turn out to be good medicine, for some reason or other. And our intellectual adversaries mostly seek to argue that in reality there is no door number (3)—that attempts to go through it will rob central banks of their independence and wind up with us going through door number (2), which we know ends badly…

[John Maynard Keynes had disagreed]: https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm (John Maynard Keynes (1936): The General Theory of Employment, Interest and Money (London: Macmillan).

Why Do We Talk About “Helicopter Money”?

Posted on by Brad DeLong

Why do we talk about “helicopter money”? We talk about helicopter money because we seek a tool for managing aggregate demand–for nudging the level of spending in an economy up to but not above the economy’s current sustainable productive potential–that is all of:

  1. Effective and successful–even in the very low interest rate world we appear to be in.
  2. Does not excite fears of an outsized central bank balance sheet–with its vague but truly-feared risks.
  3. Does not excite fears of an outsized government interest-bearing debt–with its very real and costly amortization burdens should interest rates rise.
  4. Keeps what ought to be a technocratic problem of public administration out of the mishegas that is modern partisan politics.

Right now the modal projection by participants in the Federal Reserve’s Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3% this business cycle. It would be a brave meeting participant who would be confident that we would get there–if we would get there–with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.

The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.

If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be.

Hoisted from the Archives from Fall 2011: Barclays Debate with Robert Barro, Moderated by David Wessel

Posted on by Brad DeLong

2011-09-24: DRAFT OPENING: Barclays Debate with Robert Barro, Moderated by David Wessel:

Question: If President Obama invited you into the Oval Office, told you that he recognized that the economic policies he has pursued to date haven’t had the desired outcome, and gave you five minutes to tell him what in your opinion he should do now (setting aside whether Congress would go along)?

DELONG: I would say: Mr. President: When you took office, you quickly became convinced for some reason that we were going to see a rapid, “V”-shaped recovery. Hence you took your task to be (a) stopping the panic, (b) recapitalizing the banking system, and (c) filling in a good chunk of the demand gap with the Recovery Act. Then, you thought, the task of macroeconomic stabilization would be finished. And so you turned your attention to (i) health care reform, (ii) financial regulation, (iii) long-run budget balance, and other issues.

This was wrong. We do not have a “V” but rather an “L”. Our expectations that the market was strong enough to return the economy to its long-run full-employment configuration within a couple of years–perhaps with assistance from the Federal Reserve–was wrong. The short run of slack aggregate demand, high unemployment, and low capacity utilization looks as though it will last not two to three years after the downturn begin but five to ten years–or more.

What to do? If Milton Friedman were here to advise you, he would give the same advice he gave Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have it keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. Announce that it is going to keep buying bonds for cash until total nominal spending is on a satisfactory trajectory.

Milton Friedman’s teacher, the ur-monetarist Jacob Viner, had a somewhat different take. Viner worried that when–as now–interest rates are very low, people have no incentive to spend their cash. And when you take bonds out of circulation you reduce the supply and further lower interest rates further. Viner sought a way to boost the money stock without pushing interest rates down further. He recommended coordinated monetary and fiscal expansion: the Federal Reserve buys bonds for cash, and the Treasury than issues bonds and spends, in order to (a) expond the money supply, (b) directly put people to work and © keep falling interest rates from further depressing monetary velocity and so crowding out the beneficial effects of monetary expansion.

Both Friedman and Viner would, right now, say that the problem is that their policy recommendations have not been tried on a large enough scale commensurate with the seriousness of the problem.

I concur.

And when will it be time to think about long-term budget balance? As I believe my colleague Christina Romer used to tell you every single week: the bond market and the inflation rate will tell you when it is time to turn to dealing with long-term budget balance. They are certainly not telling you to do so now.

Materials:

And from the Notes of the Debate: A Cleaned-Up Version of What I Said:

Brad DeLong: If we are talking long-run, I would say that there is considerable agreement about what the long-run configuration of government policy should be. Cutting back on the tax-free status of fringe benefits–that is definitely there in what Obama has done with the tax on high-cost “Cadillac” health plan in the Affordable Care Act. People who keep their ear to the ground hear a lot of people in and out of the administration liking the Bowles-Simpson commission’s recommendations, and hear a lot of people liking the idea of a progressive consumption tax as a way to balance revenues an the long-run funding costs of social insurance.

But if I were to talk to Obama, I would say: “Mr. President, now is not the time to focus on the long-run here. There is an important short-run long-run distinction, and the short-run problems are the urgent ones.

“When you took office, you were convinced that there was going to be a rapid V-shaped recovery. Hence you took your tasks to be (i) the recapitalization of the banking system, (ii) filling a good chunk of the demand gap with the Recovery Act, and then (iii) your attention to Robert Barro issues–healthcare reform, long run budget balance, financial regulation, et cetera. In retrospect this was wrong. We don’t have a V. We have an L. The expectation that the market was strong enough to return the economy to more or less full employment within a couple of years was wrong.

The short run, during which the economy is depressed and unemployment is high now looks to be not two or three years but rather five to ten years, and we hope it isn’t longer. What you should do about this long-lasting short-run business-cycle problem? If Milton Friedman were here, he would give the same advice to the U.S. today that he gave to Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have the Federal Reserve keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. And tell everybody that the Federal Reserve will keep buying bonds for cash until total nominal spending is where it wants it to be in order to get everyone involved in stabilizing speculation betting that the Fed will carry out this policy.

Now that is just one recommendation. Back during the Great Depression Milton Friedman’s teacher Jacob Viner worried that when interest rates are very very low people have little incentive to spend their cash. When the Federal Reerve buys bonds for cash, it increases the supply of cash but it takes bonds out of circulation. This reduction in the supply of bonds further lowers interest rates–and further depresses the incentive to spend cash. Thus normal expansionary monetary policy may fail. Viner worried that falling interest rates would crowd out the usual effects of monetary expansion.

Viner thus recommended both expansionary monetary policy and expansionary fiscal policy. The Federal Reserve buys bonds for cash. The Treasury then issues bonds and spends the money hiring people to work on government projects. Since the supply of bonds does not fall, interest rates do not fall. So monetary expansion would have its normal expansionary effects.

The right answer to the question–monetary or fiscal stimulus?–is: both.

Then Obama would ask me: “When will it be the time to worry about long -un budget deficits and all of Robert Barro’s other issues, like the financing of the social insurance state and marginal taxes and so forth?” I would give the answer that I think Christie Romer gave Obama very single week of the first year and a half of his administration: “The bond market and the inflation rate will tell you when it is time to deal with long-run issues. And they are certainly not telling you to deal with them now.”…

Brad: I have a slide that I want to put up now. It explains, I think, why Robert Barro is living in a much happier world than I am.

Robert Barro thinks that there is great uncertainty about the government budget and about government regulatory policy. And he believes that is the reason that the economy is still depressed. But if uncertainty about the government budget were the cause of our current depression, it would have started back in 2003.

In the early 1990s, the Clinton administration dealt with the Reagan deficits–over the unanimous objections of every single Republican member of congress. By the end of the 1990s the Clinton administration had balanced the budget. But by 2003 it became very clear that the Bush administration was intent on undoing as much as it could of the work of the Clinton administration. It became clear that Bush had no plans at all for cutting back federal spending to finance his tax cuts. It became clear that Bush had no plans at all to find any resources to pay for his expansion of Medicare, Medicare Part D.

Thus in 2003 we went from a world in which the long-run federal budget was on a sustainable track–a world that those of us who worked in the Clinton administration had sweated blood to create–to our current world, in which the U.S. debt to GDP ratio is on an explosive long-run trajectory and in which everything about the long-run federal budget is up for grabs. Right now we do not know whether in 25 years federal spending is going to be 20 or 30% GDP, we do not know what taxes are going to be levied to pay for that spending, and we do not even know whether we might default on the debt or inflate it away in a generation.

We have enormous long-run budgetary uncertainty.

This long-run budgetary uncertainty was created suddenly and discontinuously in 2003.

But our current deep economic downturn did not start in 2003, 2004, 2005, 2006, or 2007.

Our current deep economic downturn started with the collapse of housing followed by the Wall Street financial crisis of 2008. And our current deep recession does not continue because businesses are terrified of the future and so have cut back massively on equipment investment spending. Businesses are being reasonably aggressive at investing for the future. What is way down at the bottom is investment in residential construction. That is not a pattern that you would see if the big increase in budgetary uncertainty were the thing that drove the economy down and is keeping it down.

Now don’t get me wrong: If I had been running the Obama administration, I would on January 21, 2009 have promised to veto every bill that did not reduce the projected national debt in 2020. I would have required that every single initiative must be fully paid for within ten years in order for the administration to even consider it. I would have made it a governing principle that the Obama administration was not interested in increasing the long-run budgetary uncertainty created by George W Bush and his tame and craven supporters.

And I would have announced that as soon as the short-term crisis of our current Lesser Depression was over–as soon as the unemployment rate was back down to 6%–as soon as housing was back to normal and people had stopped doubling-up and living in their sisters’ basements because they were scared they could not get or would lose their jobs–we would turn to balancing long-run spending and taxes.

But dealing with long-run budget uncertainty that is not the cause of our current Lesser Depression will not cure it….

Brad: I did not say that uncertainty in general rose to its current level in 2003. I said uncertainty about the long-run government budget took a big upward jump in 2003.

Late 2009 sees an enormous increase in regulatory uncertainty as the Republican Party goes into opposition and declares that the healthcare reform ideas created by the Heritage Foundation and underlying RomneyCare are, in fact, Kenyan and socialistic and have to be opposed root-and-branch. That was an enormous increase in regulatory uncertainty. That came in late 2009. That was not the cause of our current Lesser Depression.

The uncertainty that is a major contributing cause to our current Lesser Depression came in 2008. One piece of it is uncertainty about whether the major money center bank you loaned your money to tonight will fail–that they will not open tomorrow. Another piece of it is uncertainty about what the level of aggregate demand is likely to be one, two, three years down the road. A third is uncertainty about whether the German government will bail out the government of Greece and the banks of Spain so they can pay back the banks of Germany so they can pay back their German depositors–or whether the German government will short-circuit the process and simply bail out the banks of Germany so they can pay back their depositors, leaving southern Europe to twist slowly in the wind.

These are the important kinds of uncertainty that are helping to cause our current Lesser Depression.

These are not kinds of uncertainty that are diminished by enacting Robert Barro’s progressive consumption tax, or by further reforming the U.S. healthcare financing system.

When I said that Barro was more optimistic than me, it was because I hear him saying that if only we could get back to the world of 2000–with projected spending levels and tax rates that Bill Clinton left us with, in which the long-run financial future of the U.S. government was secure and we had not made big Medicare Part D promises we have no idea how to fulfill–then the current Lesser Depression would rapidly end.

I would love to see us return to late Clinton policies. I do not believe that if we did so tomorrow it would rapidly cure our current depression. And I hear Robert Barro saying that it would….

Brad DeLong: Let me say that right now we have now have a rare point of agreement between Robert Barro and Paul Krugman. Paul is also highly highly skeptical of quantitative easing. Paul also fears that is is simply swapping one zero-yield government asset for another. Paul also cannot see why this should make a difference. After all, at the margin all you are doing is taking a very small amount of the risk out there onto the government’s balance sheet. It is hard to argue that that would have major effects….

Brad DeLong: Right now there is tremendous demand for long-term nominal U.S. government Treasury bonds, even though there is enormous uncertainty over how the government is going to tax in order to finance the social insurance state. Yet everyone is confident that in the long run the government is going to tax to pay its bills, and that inflation is going to remain low. Maybe the United States is the world’s tallest midget. But it’s a damn tall midget….

Brad DeLong: We really do not know what the effects of quantitative easing and other non-standard monetary policies will be. We haven’t been here before–except in the 1930s and in Japan in the 1990s. All we know is that whatever policies were tried back in the 1930s and in Japan in the 1990s did not work very well. We do not know if alternate policies will.

I think that the right way I think about it is maybe to go all the way back to the cutting edge of the maroeconomics of 1829. Start with John Stuart Mill, the very first economist to say: “Whenever we see high unemployment, it is not the case that we are producing too much. The problem is we don’t have enough financial assets for people to hold to make them happy with their portfolios. Thus everyone is cutting back on spending to try to build up their financial asset balances. And once they have done so they will once again start spending an amount equal to their incomes, and then by the circular flow principle we will quickly get back to full employment.”

It has turned out that there are three ways in which people, historically, have been unhappy with their portfolios:

  1. The standard monetarist problem we saw in 1982 was a liquidity squeeze that left everyone desperate for cash. That produced very high nominal interest rates all along the duration and risk yield curve as everyone short of cash dumped their other financial assets as well as spent less than they were earning to try to build up their cash balances.

  2. The standard Keynesian problem we saw in 2001 was that $4 trillion of dot-com wealth had vanished so everybody wanted to hold more saving vehicles–and so people started using the money they ordinarily use for transactions as a savings vehicle instead. That produced very low nominal interest rates all along the duration and risk yield curve.

  3. Today we see that the prices of all risky assets are very low–especially the bonds of the Greek government. But safe assets are, as Robert says, selling at extremely high prices. Households and businesses are cutting back their spending because they don’t think they have enough safe assets in their portfolios.

When you have a depression because the market is short of safe assets, the natural thing to do to cure it is to create the safe assets the market wants to hold. Who can do that? That the public certainly doesn’t trust banks like Barclays to create safe assets right now. The investment banks tried that with mortgage-backed securities. That did not turn out so well….

Brad DeLong: The fear is that if we raise the inflation target from one percent to four percent right now, then the next administration will probably raise it from four to seven, and then from seven to ten, and then 1979 is back again….

Brad DeLong: This crisis had its origins in late 2007, when it became clear that U..S had built two million extra houses, largely in the desert between Los Angeles and Albuquerque. It became clear that there was $500 billion of mortgage debt that was not going to be repaid. And that shouldn’t have been a problem: in a world economy of $80 trillion dollars of GDP each year, in a world where that 500 billion of tax or mortgage debt have been explicitly financed by originate-and-distribute securitization to chop up and lay off this risk to the global investor community rather than keep it in money-center banks, the 500 billion shouldn’t cause day problems.

But then we learn than an awful lot of Ireland and Irish and money center banks were still holding on to a huge amount of risk. And we learn that the capital of nearly every single major financial institution was significantly impaired if not totally gone. And then it went from there to Bear Sterns, in which the Federal Reserve wipes out the equity and option holders of the bank and subsidizes Jamie Dimon and JP Morgan to the tune of up to $30 billion to bail themselves in. After which there is then five months of beating up on Henry Paulson and Ben Bernanke for enabling more risk–for rescuing things that shouldn’t have been rescued, for creating a “we bet, and if we win we win, and if we lose we lose the government pays” state of mind. And Paulson and Bernanke respond to this six months of verbal abuse in the fall of 2008 by saying: “Okay. Well, now, as Lehman Brothers hits the wall we are going to let it default–we are not going to guarantee the creditors of Lehman brothers. See how much you like the market reaction too that!” And then–they thought–their critics would be chastened, and they would regain their freedom of maneuver to conduct proper lender-of-last-resort policy. The problem was that they misjudged how bad the market reaction would be. That decision to let Lehman fails was a complete and total disaster.

We should learn from that.

We should learn that, as Charlie Kindleberger said: In order to have a well-functioning system, everybody must always doubt that the lender of last resort exists before the financial crisis, but everybody must always be extremely confident that the lender of last resort is there in the financial crisis. This is a very neat trick to pull off–very hard to do. But the Federal Reserve via Bear Stearns and Lehman Brothers came close to pulling off the opposite.

There are always need to be people like Robert Barro saying: the right strategy is to let Greece default, and Spain, Portugal, Ireland–and maybe Italy too. Let the consequences of bad actions and overleverage rest upon the bad actors, lest you encourage more overleverage and more moral hazard in the future. But, as Charlie said and as I think Lehman Brothers strongly reinforces this lesson, when the financial crisis does come, if it’s bad and systemic enough, the lender of last resort has to show up. If you ask Charlie how you can reconcile these two he would shrug his shoulders….

Brad DeLong: What should the Europeans do tomorrow? Inflate. Move their long run price level target for the Eurozone as a whole up from its current zero to 1% up to say three to four percent. Explicitly say that we have a continent in which different regions are at very different levels of economic development, and that as a result we aren’t going to be able to maintain anything like Eurozone-wide price stability, and that we are going to aim for a long run inflation rate of 2% in the north west European core, which means 4% in the Eurozone as a whole and up to 6% in the periphery which ought to be undergoing a real appreciation over the long run as it develops.

Do that, and hope that Robert is wrong when Robert says that this will permanently de-anchor inflation expectations, and that you won’t then be able to hold the line at two percent inflation in the Northwest European industrialized core. The purpose of that is to get a slow real partial default so that the bankers don’t have to recognize it on their accounting immediately and can pretend that it isn’t happen until it is. This is how Carmen Reinhart says we solved the end of WWII debt-overhang problem, and Carmen Reinhardt is smart

Brad DeLong: Is the UK on a good governance or bad governance trajectory? Well, will they let the pound go down? Fiscal austerity in response to a recession and to great uncertainty about the long run financing of a government can be an appropriate policy response, but if and only if you are willing to let the value of your currency go where it needs to go so that you can shift activities out of government and into exports and so stay relatively close to full employment–and that means let the value of the currency go way down.

Usually you only want to do this when the bond market is telling you that it is really worried about the long run solvency of the government–when raising today’s government spending raises long-term interest rates by so much that you have massive crowding out and fiscal expansion has no traction. Then the depreciation-and-exports channel is the only way to try to stabilize aggregate demand near full employment.

The bond market hasn’t been telling us in the case of Britain.

But if Cameron really wants too, even though the bond market isn’t telling him he must do so, well he won the election–or, rather, Nick Clegg and the Liberal Democrats hate Labour more than they hate him, and so have sent him to the Queen to kiss hands. In this case, however, Cameron very much needs to have the appropriate monetary and exchange rate policies: a weak pound, a very weak pound–that is what is in Britain’s interest, if the entire policy configuration is to make any kind of sense….

Brad DeLong: The first part of your question concerns Robert Barro’s point–what Paul Krugman has been saying for 15 years–that when nominal interest rates hit zero conventional monetary policy is simply swapping one zero yield short term government asset for another and you wouldn’t expect anything from it. You should, rather, expect changes in the velocity of money to offset changes in the money supply more or less one for one. Here I would indeed go back to John Hicks and Jacob Viner: For monetary policy to have traction, you have to stuff people’s portfolios with enough bonds so that even when you expand the money supply short term nominal interest stay well above zero so people then have an incentive to spend their cash. That is why Jacob Viner back in 1993 ws asking not for monetary policy but for fiscal policy as well. You expand money supply, but also you expand the amount of bonds that the government can issue that people had to hold on their portfolios….

Must-Read: Steve Cecchetti and Kermit Schoenholtz: A Primer on Helicopter Money

Posted on by Brad DeLong

Must-Read: Ummm… But aren’t the objections to expansionary fiscal policy today all that they involve governments taking on interest rate risk–that that is not a risk governments today ought to bear? And so isn’t the fact that helicopter money extinguishes that risk and is a more stable fiscal policy than bond-financed spending the entire point?

So I don’t understand…

Steve Cecchetti and Kermit Schoenholtz: A Primer on Helicopter Money: “Helicopter money is not monetary policy…

…It is a fiscal policy carried out with the cooperation of the central bank…. If the yield curve still has any upward slope, issuing reserves rather than long-term bonds to finance fiscal expenditure will appear cheaper in terms of current debt service. However, this apparent saving is an illusion because it ignores interest rate risk…. Helicopter money may strain the relationship between the fiscal and monetary authority… creating a situation commonly known as ‘fiscal dominance.’… A central bank does not face rollover risk, so a fiscal expansion financed by central bank money is more stable than one financed by bond issuance…. But is rollover risk really a concern for the government of most advanced economies? We doubt it….

Helicopter money today is… expansionary fiscal policy financed by central bank money. And, if interest rates have fallen to the ELB, it is neither more nor less powerful than any bond-financed cut in taxes or increase in government spending in combination with QE.

Must-Read: Laura Tyson and Eric Labaye: Jumpstarting Europe’s Economy

Posted on by Brad DeLong

Must-Read: Laura Tyson and Eric Labaye: Jumpstarting Europe’s Economy: “Not so long ago… ‘helicopter money’… seemed outlandish…

…But today a surprising number of mainstream economists and centrist politicians are endorsing the idea of monetary financing of stimulus measures in different forms…. After years of stagnant growth and debilitating unemployment, all options, no matter how unconventional, should be on the table…. The United Kingdom’s referendum decision to leave the European Union only strengthens the case for more stimulus and unconventional measures in Europe. If a large majority of EU citizens is to support continued political integration, strong economic growth is critical…. The wave of corporate investment that was supposed to be unleashed by a combination of fiscal restraint (to rein in government debt) and monetary easing (to generate ultra-low interest rates) has never materialized. Instead, European companies slashed annual investment by more than €100 billion ($113 billion) a year from 2008 to 2015, and have stockpiled some €700 billion of cash on their balance sheets.
This is not surprising–businesses invest when they are confident about future demand and output growth….

Proponents of helicopter money… rightly argue that it has the advantage of putting money directly into the hands of those who will spend it…. The boost to demand might give central banks the opening they need to move interest rates back toward historical norms. This could take the air out of incipient asset bubbles that might be forming…. A less risky and time-tested route for stimulating demand would be a significant increase in public infrastructure investment funded by government debt…. Yet governments across Europe have clamped down on infrastructure spending for years, giving precedence to fiscal austerity and debt reduction in the misguided belief that government borrowing crowds out private investment and reduces growth. But the crowding-out logic applies only to conditions of full employment, conditions that clearly do not exist in most of Europe today…

Helicopter Money!: No Longer So Live at Project Syndicate

Posted on by Brad DeLong

For economies at the the zero lower bound on safe nominal short-term interest rates, in the presence of a Keynesian fiscal multiplier of magnitude μ–now thought, for large industrial economies or for coordinated expansions to be roughly 2 and certainly greater than one–an extra dollar or pound or euro of fiscal expansion will boost real GDP by μ dollars or pounds or euros. And as long as the interest rates at which the governments borrow are less than the sum of the inflation plus the labor-force growth plus the labor-productivity growth rate–which they are–the properly-measured amortization cost of the extra government liabilities is negative: because of the creation of the extra debt, long-term budget balance allows more rather than less spending on government programs, even with constant tax revenue.

Production and employment benefits, no debt-amortization costs as long as economies stay near the zero lower-bound on interest rates. Fiscal stimulus is thus a no-brainer, right?

Perhaps you point to a political-economy risk that should economies, for some reason, move rapidly away from the zero lower bound their governments will not dare make the optimal fiscal-policy adjustments then appropriate. But future governments that wish to pursue bad policies no matter what we do today. And offsetting this vague and shadowy political-economy risks is the very tangible benefit that fiscal expansion’s production of a higher-pressure economy generates substantial positive spillovers in labor-force skills and attachment, in business investment and business-model development, and in useful infrastructure put in place.

Truly a no-brainer. The only issue is “how much?” And that is a technocratic benefit-cost calculation. Rare indeed these days is the competent economist who has thought through the benefit-cost calculation and failed to conclude that the governments of the United States, Germany, and Britain have large enough multipliers, strong enough spillovers of infrastructure investment and other demand-boosting programs, and sufficient fiscal space to make substantially more expansionary fiscal policies optimal.

This is the backdrop against which we today find aversion to fiscal expansion being driven not by pragmatic technocratic benefit-cost calculations but by raw ideology. And so we find my one-time teacher and long-time colleague Barry Eichengreen https://www.project-syndicate.org/commentary/monetary-policy-limits-fiscal-expansion-by-barry-eichengreen-2016-03 being… positively shrill: While “the world economy is visibly sinking”, he writes:

the policymakers… are tying themselves in knots… the G-20 summit… an anodyne statement…. It is disturbing to see… particularly… the US and Germany [refusing] to even contemplate such action, despite available fiscal space…. In Germany, ideological aversion to budget deficits… rooted in the post-World War II doctrine of ‘ordoliberalism’… [that] rendered Germans allergic to macroeconomics…. [In] the US… citizens have been suspicious of federal government power, including the power to run deficits… suspicion… strongest in the American South…. During the civil rights movement, it was again the Southern political elite… antagonistic to… federal power…. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.

Barry, faced with the triumph of sterile austerian ideology over practical technocratic economic stewardship, concludes with a plea:

Ideological and political prejudices deeply rooted in history will have to be overcome…. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?

Barry will continue to teach the history. He will continue to teach that expansionary fiscal and monetary policies in deep depressions have worked very well, and that eschewing them out of fears of interfering with “structural adjustment” has been a disaster. But this is no longer, if it ever was, an intellectual discussion or debate.

So perhaps there is a flanking move possible. “Monetary policy” and “fiscal policy” are economic-theoretic concepts. There is no requirement that they neatly divide into and correspond to the actions of institutional actors.

German, American, and British austerians have a fear and suspicion of central banks that is rooted in the same Ordoliberal and Ordovolkist ideological fever swamps as their objections to deficit-spending legislatures. But it is much weaker. It is much weaker because, as David Glasner points out, fundamentalist cries for an automatic monetary system–whether based on a gold standard, on Milton Friedman’s k%/year percent growth rule, or John Taylor’s mandatory fixed-coefficients interest-rate rule–have all crashed and burned so spectacularly. History has refuted Henry Simons’s call for rules rather than authorities in monetary policy. The institution-design task in monetary policy is not to construct rules but, instead, to construct authorities with sensible objectives and values and technocratic competence.

And central banks can do more than they have done. They have immense regulatory powers to require that the banks under their supervision to hold capital, lend to previously discriminated-against classes of borrowers, and serve the communities in which they are embedded as well as returning dividends to their shareholders and making the options of their executives valuable. And they have clever lawyers.

Their policy interventions have always been “fiscal policy” in a very real sense. They collect the tax on the economy we call “seigniorage”. There is no necessity that they turn their seigniorage revenue over to their finance ministries. Their interventions have always altered the present value of future government principal and interest payments.

Mid nineteenth-century British Whig Prime Minister Robert Peel was criticized by many for putting too-tight restrictions on crisis action in the Bank of England’s recharter. His response was that the new charter was written to cover eventualities that people could foresee. But that should eventualities occur that had not been foreseen, the only hope was for there then to be statesmen who were willing to assume the grave responsibility of dealing with the situation. And that he was confident there would be such statesmen.

Yes, it is time for central bankers to assume responsibility and undertake what we call “helicopter money”.

It could take many forms. It depends on the exact legal structure and powers of the central banks. It also depends on the extent to which central banks are willing, as the Bank of England did in the nineteenth century, to undertake actions that are not intra but ultra vires with the implicit or explicit promise that the rest of the government will turn a blind eye. The key is getting extra cash into the hands of those constrained in their spending by low incomes and a lack of collateral assets. The key is doing so in a way that does not lead them to even a smidgeon of fear that repayment obligations have even a smidgeon of a possibility of becoming in any way onerous.

The Intellectual Industry of Manufacturing Objections to Helicopter Money/Social Credit Is a Peculiar One…

Posted on by Brad DeLong

The very sharp Nick Rowe is distressed and depressed:

Nick Rowe: “This article on helicopter money is such a mare’s nest…”

I agree with Rowe: Borio, Disyatat, and Zabal seem to me to be confused. They seem to be saying that in the long-run a permanent increase in the nominal non-interest-bearing monetary base must be “financed” by one of:

  1. raising reserve requirements–thus imposing financial repression and levying an implicit tax on the banking sector.
  2. transforming the monetary base at the margin into interest-bearing debt.
  3. keeping the policy interest rate at zero permanently so that there is perfect substitutability between interest-bearing government debt and the non-interest-bearing monetary base.

My first reaction is that they have missed:

(4) a higher future price level so that the nominal non-interest-bearing monetary base is not an increase in the real non-interest-bearing monetary base.

And my second reaction is that their conclusion is simply not right. Their conclusion is that helicopter money

is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the desired additional expansionary effects…

And thus, at least in a world of Ricardian equivalence where interest rates will not permanently remain at the zero lower bound, helicopter money is completely impotent.

But Bernanke covered this long ago:

If the price level were truly independent of money issuance, then the monetary authority could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we shall see it is quite corrosive of claims of monetary impotence…

The ECB’s problem right now is that it simply cannot meet its inflation target using its standard policy tools. Helicopter money would enable the ECB to meet its inflation target–and in that lies its additional power to stimulate production and employment.

Claudio Borio, Piti Disyatat, and Anna Zaba: Helicopter money: The illusion of a free lunch: “Beware of central banks bearing gifts…

…Helicopter money, as typically envisioned, comes with a heavy price: it means giving up on monetary policy forever. Once the models are complemented with a realistic interest-rate setting mechanism, a money-financed fiscal programme becomes more expansionary than a debt-financed programme only if the central banks credibly commits to setting policy at zero once and for all. Short of this, these models would suggest a rather limited additional expansionary impact of monetary financing. If something looks too good to be true, it is. There is no such thing as a free lunch.

Social Credit and “Neutral” Monetary Policies: A Rant on “Helicopter Money” and “Monetary Neutrality”

Posted on by Brad DeLong

Must-Read: Badly-intentioned or incompetent policymakers can mess up any system of macroeconomic regulation. And we now have two centuries of history of demand-driven business cycles in industrial and post-industrial economies to teach us that there is no perfect, automatic self-regulating way to organize the economy at the macroeconomic level.

Over and over again, the grifters, charlatans, and cranks ask: “Why doesn’t the central bank simply adopt the rule of setting a “neutral” monetary policy? In fact, why not replace the central bank completely with an automatic system that would do the job?”

Over the decades many have promised easy definitions of “neutrality”, along with rules-of-thumb for maintaining it. All had their day:

  • advocates of the gold standard,
  • believers in a stable monetary base,
  • devotees of a constant growth rate for the (narrowly defined) supply of money;
  • believers in a constant growth rate for broad money and credit aggregates;
  • various “Taylor rules”.

And the answer, of course, is that by now centuries of painful experience have taught central bankers one thing: All advocates, wittingly or unwittingly, were simply selling snake oil. All such “automatic” rules and systems have been tried and found wanting.

It is a fact that all such rule-based central bank policies and all such so-called automatic systems have fallen down on the job. They have failed to properly manage “the” interest rate to set aggregate demand equal to potential output and balance the supply of whatever at that moment counts as “money”, in whatever the operative sense of “money” is at that moment, to the demand for it.

Nudging interest rates to the level at which investment equals savings at full employment is what a properly “neutral” monetary policy really is.

Things are complicated, most importantly, by the fact that the business-cycle patterns of one generation are never likely to apply to the next. Consider: At any moment in the past century, the macroeconomic rules-of-thumb and models of economies’ business-cycle behavior that had dominated forty, thirty, even twenty years before–the ones taught then to undergraduates, assumed as the background for op-eds, and including in the talking points of politicians whose aides wanted them to sound intelligent in answer to the first question and fuzz the answer to the follow-up before ducking away. We can now see that, for fifteen years now, central banks have been well behind the curve in their failure to recognize that the business-cycle pattern of the first post-World War II generations has definitely come to an end. The models and approaches developed to understand the small size of the post-WWII generation’s cycle and its bias toward moderate inflation are wrong today–and are worse than useless because they propagate error.

And this should not come as a surprise. Before World War I there were the truths of the gold standard and its positive effect on “confidence”–the ability of that monetary system to, as Alfred and Mary Marshall put it back in 1885, induce:

confidence [to] return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others…

and so restore prosperity.

Yet those doctrines proved unhelpful and destructive to economies trying to deal with the environment of the 1920s and 1930s.

Those scarred by the 1970s have, ever since, been always certain that another outbreak of inflation was on the way. They have been certain that central bankers need to be, first of all, hard-nosed men. And so those scarred missed the great tech and stock booms of the end of the first millennium. Their advice was bad then. It is bad now.

More recently, there were those who drew the lesson from the twenty years starting in the mid-1980s that central bankers had finally learned enough to be able to manage an economy to keep the business cycle small–the so-called “Great Moderation”. They were completely unready for 2007-9. And they have had little or nothing useful to say since. Their advice was bad then. It is bad now.

And looking back at this history, right now the odds must be heavy indeed that people are barking up the wrong tree when they, today, fixate on the need for higher interest rates to fight the growth of bubbles. Or when they, today, talk about the danger that central bankers will be unable to resist pressure from elected governments to finance substantial government expenditures via the inflation tax.

The cross-era successes of macroeconomic theory as relevant to policy have been very limited. The principles that have managed to remain true enough to be useful across eras take the form of principles of modesty:

  1. There is the Mill-Fisher insight: We should look closely at the demand for and supply of liquid cash money, because a large excess demand for cash is likely to trigger a large demand shortfall of currently-produced goods and services. But Milton Friedman and others’ attempts to turn this into a rigid mechanical forecasting rule and a rigid mechanical k%/year money-growth policy recommendation blew up in their face.

  2. There is the Wicksell-Keynes insight: We should look closely at the supply of savings and the demand for finance to fund investment. But, again, Walter Heller’s and others’ attempts to turn this into a model that could then be used to guide fine tunings of policy blew up in their face.

  3. There are the Bagehot-Minsky insights: The insights about leverage, debt, and the macro economic consequences of sudden psychological phase transitions of assets from from rock-solid to highly-risky. But so far nobody in the Bagehot-Minsky tradition has even tried to construct a counterpart to the mechanical Keynesianism of the 1960s or the mechanical monetarism of the 1980s.

And by now this has become far too long to be a mere introduction to one of today’s must-reads: the very sharp Adair Turner:

Adair Turner: The Helicopter Money Drop Demands Balance: “Eight years after the 2008 financial crisis…

…the global economy is still stuck…. Money-financed fiscal deficits — more popularly labelled ‘helicopter money’ — seems one of the few policy options left…. The important question is political: can we design rules and responsibilities that ensure monetary finance is only used in appropriate circumstances and quantities?… In the real world… most money is… created… by the banking system… initial stimulus… can be multiplied later by commercial bank credit and money creation… [or] offset by imposing reserve requirements….

The crucial political issue is the danger that once the taboo against monetary finance is broken, governments will print money to support favoured political constituencies, or to overstimulate the economy ahead of elections. But as Ben Bernanke, former chairman of the US Federal Reserve, argued recently, this risk could be controlled by giving independent central banks the authority to determine the maximum quantity of monetary finance….

Can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so? The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate…

Adair Turner is very sharp. But this is, I think, more-or-less completely wrong: There is no set of institutions that can leap the hurdle that he has set–there never was, and there never will be. But it is madness to say: “Since we cannot find institutions that will guarantee that we follow the right policies, we must keep our particular institutions and policies that force us to adopt the wrong ones.” Sufficient unto the day is the evil thereof. Fix that evil now–with an eye on the future, yes. But don’t tolerate evils today out of fear of the shadows of future evils that are unlikely to come to pass.

Must-Read: Simon Wren-Lewis: Helicopter Money and Fiscal Policy

Posted on by Brad DeLong

Must-Read: What I often hear: “Expansionary fiscal policy increases the burden of the national debt. That’s the reason expansionary fiscal policy is too risky. Helicopter money–social credit–is expansionary fiscal policy. But expansionary fiscal policy is too risky. Hence helicopter money is too risky.”

Stupid or evil? Simon Wren-Lewis does some intellectual garbage collection:

Simon Wren-Lewis: Helicopter Money and Fiscal Policy: “John Kay and Joerg Bibow think additional government spending on public investment is a good idea…

…We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish… can sometime clarify… ultimately… HM is what it is. Arguments that… use definitions to… conclude that central banks should not do HM because it’s fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over…..

At this moment in time… public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt…. HM does not stop the government doing what it wants with fiscal policy. Monetary policy adapts to whatever fiscal policy plans the government has, and it can do this because it can move faster than governments…. Kay… also suggests that HM is somehow a way of getting politicians to do fiscal stimulus by calling it something else. This seems to ignore why fiscal stimulus ended. In 2010 both Osborne and Merkel argued we had to reduce government borrowing immediately because the markets demanded it. HM… avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus…. Many argue that these concerns about debt are manufactured… deficit deceit. HM, particularly in its democratic form, calls their bluff….

There is a related point in favour of HM that both Kay and Bibow miss. Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do?