Tag: Liquidity Trap

Why is it called: “helicopter money”? Why isn’t it called: “expansionary fiscal policy with monetary support to neutralize any potential crowding-out of private-sector spending”?

Why did Milton Friedman set it forth in his writings as one of the paradigmatic cases of expansionary monetary policy? Why did Ben Bernanke refer to it and so gain his unwanted nickname of “Helicopter Ben”?

In Milton Friedman’s case, I believe that it was a conviction that the LM curve was steep enough and the IS curve flat enough that the fiscal side was fundamentally unimportant–that about the same effects were achieved whether the extra money was introduced into the economy via being dropped from helicopters or via open-market operations. To focus on how open-market operations worked would thus confuse listeners who would then have to think through asset market-equilibrium to no substantive gain in understanding. In Friedman’s view, the entire Tobin analytical tradition, not to mention Wicksell, was largely a distracting waste of time. So why go there?

In the case of Ben Bernanke and of the rest of the participants in today’s debate, I think it is has different causes. I think it is a result of the default Washington-Consensus Great-Moderation assignment of the stabilization-policy role to independent and technocratic central banks. In that paradigm, directly-elected governments are supposed to limit their focus to the “classical” tasks of rightsizing the public sector and adopting an appropriately-prudent long-term government-spending financing plan.

To speak of “expansionary fiscal policy with monetary support to neutralize any potential crowding-out of private-sector spending” is to open a can of worms. To speak of “helicopter money” is to convey the impression that this is the central bank undertaking its proper business, but in a context in which as a result of unfortunate historical accidents of institutional development the independent central bank needs the active support of the directly-elected government. The active support of the directly-elected government is needed undertake what is, after all, a fundamentally monetary policy. And it is, in this line of thinking, a fundamentally monetary policy: Milton Friedman himself said so.

Now comes the extremely-sharp Adair Turner to try to focus the debate in a productive direction.

Many today are unwilling to advocate for more expansionary fiscal policy out of:

1. a fear that many economies that would find their governments engaging in it lack fiscal space for it to be of much use,
2. a fear that directly-elected governments allowed to cross the line and engage in open-ended explicitly stabilization policy will not give due weight to the objective of keeping inflation low over the long term, or
3. a fear that central banks allowed to control fiscal-policy levers will be captured by and use their powers to then take taxpayers’ money and spend it enriching the banking sector.

So what is the solution? How can we build institutions that will:

1. avoid the Scylla of allowing directly-elected governments that use fiscal levers in support of monetary expansion to enforce fiscal dominance and abandon prudent inflation targets, while also

2. avoiding the Charybdis of allowing central banks that may well have been partially-captured by their banking sectors of using their powers to spend the taxpayers’ money further enriching the bankers?

The solution is obvious: Social Credit. Adopt the policies of the Social Credit Part of Alberta in the 1930s. Adopt the policies of Upton Sinclair’s campaign for Governor of California in the 1930s. Adopt the policies that are taken as a matter of course and are in the background of Robert A. Heinlein’s 1947 novel Beyond This Horizon.

Central banks should, instead of taking all the revenue from seigniorage they create and transferring it all back to the Treasury, calculate each quarter how much of the seigniorage they hold should be distributed to citizens in the form of that quarter’s helicopter drop.

I am not certain about how the legal-institutional constraints bind the BoJ, and ECB, and the BoE. I believe that the Federal Reserve could start such a policy régime today:

1. Incorporate–for free–everybody with a Social Security number as a bank holding company.
2. Let everybody then have their personal bank holding company join–again for free–the Federal Reserve system as a member bank.
3. Offer every such personal bank holding company a permanent long-term open-ended infinite-duration zero-interest line-of-credit to draw on, up to some set maximum nominal amount.
4. Raise the amount of the line-of-credit maximum every quarter by that quarter’s desired helicopter drop.

The same institutional forces that have, since the selection Paul Volcker, kept the Federal Reserve focused on avoiding an inflationary spiral would still bind. There would be no way to gimmick such a Social Credit system to turn it into a giveaway to the bankers. It would give the Federal Reserve the power to engage in the one policy that nearly all economists are confident will always have traction on nominal demand. Once the Federal Reserve was off and rolling, other central banks would, I think, quickly find mechanisms within their current institutional-legal competence to accomplish the same ends.

And it would, I think, make the FOMC and its members “very popular”, as Marty Feldman playing Igor in the movie Young Frankensteinsays of the monster they are creating.

Adair Turner: Are Central Banks Really Out of Ammunition?: “The global economy faces a chronic problem of deficient nominal demand…

…But the debate about which policies could boost demand remains inadequate, evasive, and confused. In Shanghai, the G-20 foreign ministers committed to use all available tools – structural, monetary, and fiscal – to boost growth rates and prevent deflation. But many of the key players are keener to point out what they can’t do than what they can….

Central banks frequently stress the limits of their powers, and bemoan lack of government progress toward ‘structural reform’…. But while some [SR measures] might increase potential growth over the long term, almost none can make any difference in growth or inflation rates over the next 1-3 years…. Vague references to ‘structural reform’ should ideally be banned, with everyone forced to specify which particular reforms they are talking about and the timetable for any benefits that are achieved…. Central bankers are right to stress the limits of what monetary policy alone can achieve…. Negative interest rates, and… yet more quantitative easing… can make little difference to real economic consumption and investment. Negative interest rates… [may have the] the actual and perverse consequence… [of] higher lending rates….

Nominal demand will rise only if governments deploy fiscal policy to reduce taxes or increase public expenditure – thereby, in Milton Friedman’s phrase, putting new demand directly ‘into the income stream.’ But the world is full of governments that feel unable to do this. Japan’s finance ministry is convinced that it must reduce its large fiscal deficit…. Eurozone rules mean that many member countries are committed to reducing their deficits. British Chancellor of the Exchequer George Osborne is also determined to reduce, not increase, his country’s deficit. The standard official mantra has therefore become that countries that still have ‘fiscal space’ should use it. But there are no grounds for believing the most obvious candidates – such as Germany – will actually do anything….

These impasses have fueled growing fear that we are ‘out of ammunition’…. But if our problem is inadequate nominal demand, there is one policy that will always work. If governments run larger fiscal deficits and finance this not with interest-bearing debt but with central-bank money…. The option of so-called ‘helicopter money’ is therefore increasingly discussed. But the debate about it is riddled with confusions.

It is often claimed that monetizing fiscal deficits would commit central banks to keeping interest rates low forever, an approach that is bound to produce excessive inflation. It is simultaneously argued (sometimes even by the same people) that monetary financing would not stimulate demand because people will fear a future ‘inflation tax.’
Both assertions cannot be true; in reality, neither is. Very small money-financed deficits would produce only a minimal impact on nominal demand: very large ones would produce harmfully high inflation. Somewhere in the middle there is an optimal policy…. The one really important political issue is ignored: whether we can design rules and allocate institutional responsibilities to ensure that monetary financing is used only in an appropriately moderate and disciplined fashion, or whether the temptation to use it to excess will prove irresistible. If political irresponsibility is inevitable, we really are out of ammunition that we can use without blowing ourselves up. But if, as I believe, the discipline problem can be solved, we need to start formulating the right rules and distribution of responsibilities…

Note also that chapter 23, “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption”, of John Maynard Keynes’s General Theory of Employment, Interest and Money can be read with great profit here…