A quick note on “helicopter drops”
So, David Beckworth has a fantastic piece arguing that, in service of an NGDP target, the Fed might sometimes coordinate with the treasury to arrange “helicopter drops”, which Beckworth defines as” a government program that gives money directly to households”.
Scott Sumner quibbles, noting that
No country has been doing more “helicopter dropping” over the past 20 years than Japan. They’ve massively boosted both their national debt and their monetary base (which is what “helicopter drops” mean to economists.) And their NGDP is lower than 20 years ago. Not good.
Sumner is right that economists often use the phrase “helicopter drop” to refer to any sort of money-financed stimulus, that is, any government spending funded by bonds that are sold (directly or indirectly) to the central bank. That convention is unfortunate, as it obscures the clear intention of Milton Friedman’s original thought experiment, which involved helicopters and dollar bills and no government spending at all. Friedman’s musings concerned the notion of simply distributing money to humans, with no selection of worthies from unworthies or cronies from schlubs, and no government-directed flow of real resources.
Japan has been the king of “helicopter drops” under the money-financed government spending definition, but has never undertaken the sort of direct-to-household, unconditional transfers that Beckworth proposes. Beckworth is very clear that he supports heli drops precisely because “[f]iscal policy geared toward large government spending programs is likely to be rife with corruption, inefficient government planning, future distortionary taxes, and a ratcheting up of government intervention in the economy.” Direct, unconditional, uniform transfers to households are nearly immune to corruption and involve no increase in the degree to which government directs the use of real economic resources. (See this excellent piece by Matt Bruenig.) Japan’s fiscal policy, on the other hand, has been notorious for cronyism, and has directed oceans of sweat and concrete into infrastructure.
Sumner and Beckworth are simply using different definitions of “helicopter drop”. Sumner’s objections are less persuasive if we do Beckworth the courtesy of accepting his definition for the purpose of evaluating his proposal. Perhaps we should insist Beckworth use a less ambiguous phrase, or perhaps we should reject the conventional but unfortunate generalization of Friedman’s evocative thought experiment. But that semantic quarrel shouldn’t be allowed to seep into a substantative controversy.
Readers should note that I am not neutral in this argument: my position is very close to Beckworth’s. Although it’s not perfect, I’ve been persuaded (largely by Sumner!) that the best macro- policy we can hope for in the medium term is targeting an NGDP level path. Like both Sumner and Beckworth, I believe there are circumstances under which conventional monetary policy (defined as central-bank sales and purchases of obligations issued or guaranteed by the US Treasury) might not be sufficient to maintain that target. Sumner argues that we augment conventional monetary policy with negative 2% IOR (effectively a tax on bank reserves), and then no fiscal supplement would ever be necessary. He suggests that negative IOR would be preferable to direct-to-household transfers. Beckworth may or may not agree with that, but he is clearly open to the possibility of using transfers rather than negative IOR to supplement conventional policy, perhaps because he thinks transfers would be better policy, or perhaps as a concession to the political and institutional barriers that would have to be overcome before the Federal Reserve would impose negative rates. My view is that all tools have their place, but direct-to-household transfers are often preferable even to conventional monetary policy (while traditional fiscal policy — outright government spending — in general is not). Beckworth and I might quarrel a bit, but our disagreements would be over the magnitudes of various costs and benefits associated with direct-to-household transfers vs interest-rate policy and other interventions usually described as “monetary”.
It is something of a cliché, I hate to belabor the point, since everybody understands that Scott Sumner and Paul Krugman are practically twins in the blogosphere. But it does become tiresome to constantly read views that are nearly indistinguishable. When Sumner writes
Helicopter drops must be reversed in the long run, at the cost of distortionary taxation. Better to cut distortionary taxes today.
he assumes, as Krugman has, that eventually the monetary base will not be interest-bearing, or at least that there will someday be a significant opportunity cost associated with holding reserves. I think that assumption is mistaken. For the indefinite future, I believe the Federal Reserve will pay interest-on-reserves very close to or above the short-term Treasury rate, so that there will be no opportunity cost to holding bank reserves. (This is the so-called “floor system“.) If I am right, then there will never be a need to reverse transfers via “distortionary” taxation. Instead, in a better economy, the transfers will be sterilized by raising interest on reserves. That doesn’t mean the transfers are costless. In “ordinary” times, we assume (without much evidence) that the macroeconomic cost of government spending is high interest rates, which hinder growth-enhancing private investment. In an economy which has recovered after Beckworth-esque helicopter drops (and which has not reversed the transfers via taxation), an inflation- or NGDP-targeting central bank might need to impose interest rates higher than they would have imposed absent the expansion of the monetary base. Higher interest rates would exact a toll. But that toll would be no more “distortionary” than conventional interest rate policy by central banks.
So, in ordinary times, helicopter drops might not be a free lunch. But at present they almost certainly would be. Sumner may argue that our current problems result from a lack of determination or nerve at the monetary authority, and perhaps he is right. But whether due to economic law or human foible, moments where zero is an insufficiently low interest rate to achieve a desirable NGDP path without supplementary policy seem… irksome. People lose jobs, suicide rates spike, things get double-plus ungood. An intervention whose “cost” was to raise the “natural” rate of interest above zero would be welcome in practice, even though it would render uneconomic some real investments that would be profitable at very low hurdle rates. The “cost” of fiscal policy under a floor system — higher future interest rates — becomes a benefit, all things considered, if it pushes us into a more comfortable, prudence-rewarding, positive-interest-rate world. General fiscal may be undesirable for fear of corruption and misuse of real resources, but Beckworth’s heli drops avoid all that. [1]
This conversation was provoked by an excellent Cardiff Garcia article, with whose spirit I very strongly agree. It’s all very fun to draw lines and spit across them. But letting differences divide “monetarists” and “fiscalists” is letting divergent conceptions of perfect become the enemy of the good. In a market monetarist’s perfect world, the fiscal multiplier is zero, but we all agree that’s not necessarily the case here in purgatory. In a fiscalist’s perfect world, a sluggish economy is an opportunity to produce valuable public goods costlessly, but in practice our political system may be too broken or corrupt to deliver. I applaud Beckworth for offering a plan we could implement without assuming the can opener of institutions much better than those we actually have.
Notes:
[1] If the distribution of market income is sufficiently concentrated, I worry that “helicopter drops” might fail to create conditions that allow a target-disciplined central bank to raise interest rates. In narrow fiscal terms a certain sense, that would render permanent heli drops a free lunch, so yay. However, permanent heli drops that are broadly distributed but accumulate to a narrow class might lead to expanding inequality, financial instability, and social mayhem, unless countered by the “T”-word that economists find so distortionary.
Update: Reading through the comments, I think it worth distinguishing between “a fiscal cost” and the “cost of fiscal policy”. Helicopter drops are most certainly fiscal policy (thanks JKH), and they have a fiscal cost in an accounting sense. If helicopter drops are arranged as Beckworth suggests, via an Fed/Treasury coordination, then public debt explicitly rises. If they are implemented as direct transfers from the central bank, then the obligations of the central bank increase, which is a cost to the Treasury as the beneficial owner of the central bank’s cash flows. (The US Fed’s “private shareholders” lay claim to only a small, fixed dividend.) Helicopter drops are fiscal policy.
However, this piece is mostly concerned not with fiscal costs in an accounting sense, but the real cost of fiscal policy. Suppose, as I fear in the footnote, that helicopter drops put no durable pressure on inflation or NGDP, so that an inflation- or NGDP-targeting central bank is not compelled to raise interest rates in response. The helicopter drops are still fiscal policy, they still have some kind of accounting cost to the Treasury or the central bank or both. (This cost may or may not be offset in the accounts by some intangible asset, but let’s leave that aside for now.) However, if this “fiscal cost” does not affect prices or interest rates, it has no real cost to the economy in the sense of displacing or “crowding out” private sector investment.
Let’s imagine heli drops implemented qua Beckworth, via Fed/Treasury coordination, because it simplifies the accounting. Suppose the helicopters fly, everybody receives some cash, but they deposit the funds, in banks or mattresses, with no effect on actual expenditures. NGDP is then unaffected. Public debt to GDP rises. But there is no real-resource cost to the program, no displacement of investment by consumption, nothing that prevents the helicopter drops from continuing uselessly but indefinitely without harming the economy (except for fear of arbitrary debt-to-GDP thresholds). Alternatively, suppose everybody takes the money and spends it on goods, and the recipients of those expenditures are also inclined to spend, etc so that there is a large multiplier: one dollars of helicopter drops leads to many dollars of actual exchange. Real resources remain constrained, so an inflation- or NGDP-targeting central bank would be forced to raise interest rates to persuade some people to hold rather than spend the new money rather than bid-up prices or expand NGDP past the target. High interest rates mean high hurdle rates for real investment projects. Investment expenditures are effectively curtailed to make room for the additional consumption enabled by the heli drops. That displacement is the real cost of the policy. When the central bank’s target binds, fiscal spending today (heli drop or otherwise) has a cost in future production and therefore growth.
In general, this is the nature of a currency-issuing government’s budget constraint. A government can spend what it likes, there is no limit to the quantity of obligations it can issue. The cost of the issuance is paid either in inflation or high interest rates, both of which are thought to exact a toll on the quality and growth of the real economy. Fiscal policy that does not put pressure on nominal expenditures and so force an inflation/interest-rate tradeoff is still fiscal policy, still “costly” in a government accounting sense, but has no real cost in terms of diminishing resources deployed for future growth. It might still have more subtle costs in terms of distribution and financial stability, which is why I describe this “costless” scenario as something to be feared more than hoped-for in the footnote.
Update History:
- 16-Jun-2013, 3:35 a.m. PDT: Reworked sentence, originally “But while helicopter drops in ordinary times might not be a free lunch, at present they almost certainly would be.”; Added “the”: “under the money-financed government; added link to moral case for GDP targeting post.
- 16-Jun-2013, 9:40 a.m. PDT: Added long, bold update. Explicitly struck “In narrow fiscal terms” in the note an replaced it with “In a certain sense”, because if “narrow fiscal terms” are interpreted naturally as fiscal accounting terms, the statement is inaccurate. The sense in which the helicopter drops are costless is clarified in the update. Explicitly marked the notes section “Notes”, because I want the update after the notes and it looked confusing.
My view is that all tools have their place, but direct-to-household transfers are often preferable even to conventional monetary policy (while traditional fiscal policy — outright government spending — in general is not). … The “cost” of fiscal policy under a floor system — higher future interest rates — becomes a benefit, all things considered, if it pushes us into a more comfortable, prudence-rewarding, positive-interest-rate world. General fiscal may be undesirable for fear of corruption and misuse of real resources, but Beckworth’s heli drops avoid all that.
… If I am right, then there will never be a need to reverse transfers via “distortionary” taxation. Instead, in a better economy, the transfers will be sterilized by raising interest on reserves.
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No corruption from direct transfers, you say? People as diverse as FDR and Nixon opposed direct transfers because they corrupted people’s will to work. There are a variety of explicit and implicit ways of reversing excess money (all imposing pain on someone); unclear how you can be confident which occurs.
June 15th, 2013 at 11:47 pm PDT
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[…] A quick note on “helicopter drops” […]
June 16th, 2013 at 12:11 am PDT
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[…] A quick note on “helicopter drops” […]
June 16th, 2013 at 12:12 am PDT
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Singapore does do direct payments to households as fiscal stimulus and/or simply as a way to enable everyone to share in rising prosperity. It seems a shame that countries with a free press and legalized chewing gum don’t seem to value and respect their own people enough to do so.
I think a lot of the apparent contradictions in our economy stem from the economy insufficiently reflecting the choices of all the individuals as to how time and resources should be used. Helicopter drops put financial power in the hands of everyone and so rectify that.
vbounded@I “No corruption from direct transfers, you say? People as diverse as FDR and Nixon opposed direct transfers because they corrupted people’s will to work.”
I think the crucial point is that direct transfers occur irrespective of whether people earn other money on top. So they don’t cause economic exclusion by causing people to need to stay out of work so as to get the benefit.
I’m with Michal Kalecki’s statement, “The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?”
June 16th, 2013 at 4:20 am PDT
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Nice post.
But do we really need to construct Rube Goldberg machines that are more complicated than what we have now?
This is fiscal policy. Refundable tax credits in effect. Money in the bank.
“Sometimes coordinate with the treasury” is moot in that sense. That mode, insofar as it applies, is not unique here.
And what does it mean for the central bank to “provide the funding” in this case? There is no economic rationale for the Fed to “provide the funding” in this case any more than any other case. Treasury and the Fed jointly have a massive portfolio of liabilities, requiring some semblance of an integrated overview. What’s the argument for “providing the funding” in this particular case? The analysis of desirable incremental spending and appropriate incremental funding are two separate issues, each with stronger connections to their own categories than to each other.
If there is such an NGDP “law” in place, then Treasury sends the cheques out. It can finance with bonds or bills and the Fed can buy them back. It can be part of the existing QE.
But if “providing the funding” is intended to be some kind of change in the institutional arrangements, “convenient” marginal tinkering and slippage is not the best way to do that.
And its deficit financing. The laws of accounting don’t get changed just because the proposal is “unconventional”. You keep track of what’s going on, whether the thing is financed by treasury bills, bonds, bank reserves, or currency. It’s fiscal.
Fullwiler was the one that made this fiscal point clearly – a good add to your list:
http://neweconomicperspectives.org/2010/01/helicopter-drops-are-fiscal-operations.html
As far as NGDP target piece is concerned, that won’t happen – in the sense of tactical level policy synchronization – which this type of proposal represents. The whole thing is too brittle to meet the test of tactical robustness. It’s a fixed rate system in effect (the fixed rate in this case being the NGDP growth rate), and it fails to build in required tactical flexibility as is the case at least much more so with flexible inflation targeting. All fixed rate systems eventually fail in their integrity.
“Helicopter drop” is just a bad phrase. It should have been left in the Bernanke speech, abandoned for purposes of articulating policy proposals beyond that.
The Fed is and has been on record for some time stating its intention to return to a pre-2008 reserve environment, however long that takes. This shouldn’t be a surprise, given than excess reserve funding is a distortion of the current system design. It represents distributional inefficiency, given that a chunk of the financial assets created by the government are jammed into the banking system, instead of being available for broad ownership. That’s not the case with normal excess reserve calibration. Reserves were never designed to be financing conduits for purposes beyond the immediate needs of the banking system.
June 16th, 2013 at 7:21 am PDT
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Agree with JKH that this is
total gibberishis a fine post other than the parts about NGDP targeting and helicopter drops…June 16th, 2013 at 7:51 am PDT
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I think it is dangerous to see negative interest on reserves as a benign “why not give it a try” type idea. If that 2% (or whatever) tax on reserves was not matched by an equal tax on other assets, then it would simply pump up wacky volatility in asset and commodity prices as banks tried to hold other assets instead of reserves and so the reserves got passed around like a hot potato. Ironically it could cause a greater share of production to be skimmed off by the financial sector because trading advantages (such as HFT systems, more access to leverage etc) would enable that volatility to be harvested at the expense of the real economy.
June 16th, 2013 at 8:05 am PDT
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As Tim Duy recently noted, QE seems to be deflationary, based upon the data. If one has a track record of undertaking policies with the exact opposite effects on what is targeted, then any discussion of more of the same, and thinking that this will boost “expectations”, is worthy of ridicule.
Of course, giving everybody money will stimulate demand. I am in favor of this…
June 16th, 2013 at 8:17 am PDT
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Here’s a link Duy’s article: Falling Inflation Expectations.
I think Ben Bernanke is right — We need fiscal stimulus, and not more central bank mumbo jumbo…
June 16th, 2013 at 8:22 am PDT
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” there will never be a need to reverse transfers via “distortionary” taxation”
This depends on the NPV of expected seigniorage. If that NPV falls, then Treasury will earn less than expected on Fed remittances. Therefore a potential drop in the NPV of seigniorage represents a contingent tax liability for taxpayers.
If the Fed issues IOR-bearing reserves to finance a helicopter drop, what happens to the NPV of expected seigniorage? The Fed creates an interest-paying liability. Against this, it creates no asset. Therefore, the NPV of seigniorage falls.
June 16th, 2013 at 10:10 am PDT
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I suppose the stochastic market efficiency asset pricing model of Ole Peters might allow actual estimates of how much negative interest on reserves would cost the real economy in terms of increased commodity and asset price volatility. How much more farmers , food processors, industrialists, transport companies etc would have to spend on hedging. Perhaps even how many urban poor in the third world would starve due to grain price spikes.
June 16th, 2013 at 10:29 am PDT
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Here’s Bernanke in a footnote to his 2002 helicopter drop speech:
“Some have argued (on theoretical rather than empirical grounds) that a money-financed tax cut might not stimulate people to spend more because the public might fear that future tax increases will just “take back” the money they have received. Eggertson (2002) provides a theoretical analysis showing that, if government bonds are not indexed to inflation and certain other conditions apply, a money-financed tax cut will in fact raise spending and inflation. In brief, the reason is that people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation. Hence they will believe the government’s promise not to “take back” in future taxes the money distributed by means of the tax cut.”
I’d support helicopter drops but would guess that they’ll be politically difficult to enact over the Republican’s blocking minority. (“Your average Joe would just buy booze, drugs and lottery tickets.” Clinton triangulated on “welfare reform.”) Once effective fiscal stimulus is simply aid to state and local governments which are budget-constrained. Aid to the states worked in the past, they lay off fewer government workers. But again, the Republicans blocked that aid this past time around.
The MM members of the “Stimulati” appear to be a small minority of the broad conservative movement. They’re like the libertarians. The intelligence contractor who leaked the NSA’s secret surveillance policies donated twice to Ron Paul and yet many conservatives deride him as a criminal.
June 16th, 2013 at 12:11 pm PDT
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“Japan has been the king of “helicopter drops” under the money-financed government spending definition, but has never undertaken the sort of direct-to-household, unconditional transfers that Beckworth proposes.”
Are you issuing a bond? Yes/No
If yes, who is buying?
June 16th, 2013 at 6:06 pm PDT
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“I believe there are circumstances under which conventional monetary policy (defined as central-bank sales and purchases of obligations issued or guaranteed by the US Treasury)”
Wrong definition???
June 16th, 2013 at 6:10 pm PDT
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“Although it’s not perfect, I’ve been persuaded (largely by Sumner!) that the best macro- policy we can hope for in the medium term is targeting an NGDP level path.”
What about this scenario?
RGDP 3%, P 2%, NGDP about 5%.
“Something happens”. RGDP 1%, P .5%, NGDP about 1.5%.
Next, RGDP 1%, P 2%, NGDP about 3% and stays there.
What is happening if P is raised to 4% and RGDP starts falling?
June 16th, 2013 at 6:12 pm PDT
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“Sumner argues that we augment conventional monetary policy with negative 2% IOR (effectively a tax on bank reserves), and then no fiscal supplement would ever be necessary. He suggests that negative IOR would be preferable to direct-to-household transfers.”
Currency = 800 billion. Central bank reserves = 2.2 trillion. Demand deposits = 6.2 trillion. All the currency is circulating, and 4.2 trillion of the demand deposits are circulating. Some people use medium of account (MOA) = currency plus central bank reserves. They see 2.2 trillion “locked up” (or maybe even saved) in the banking system. They want the 2.2 trillion out of the banking system. So they say make IOR negative. Let’s start there. First, set IOR at negative 2% for just the central bank reserves. I believe the banks will convert the central bank reserves 1 to 1 to currency (assume they can store the currency). Currency = 3.0 trillion (800 billion and 2.2 trillion in the banking system). Central bank reserves = 0. Demand deposits = 6.2 trillion. Next, they say set IOR at negative 2% for central bank reserves AND vault cash. OK. I believe the banks will set checking account rates, savings account rates, and CD (time deposit) rates at around negative 2%. Everybody reacts by taking everything out of the banks. Currency = 7.0 trillion. Central bank reserves = 0. Demand deposits = 0. I don’t believe anything will change much. I see MOA = medium of exchange (MOE) = currency plus demand deposits. At the beginning, there was 800 billion in currency and 4.2 trillion in demand deposits circulating with 2.0 trillion being saved in demand deposits. At the end, there is 5.0 trillion in currency circulating and 2.0 trillion being saved in currency. Others will say currency went up to 7.0 trillion so NGDP should go up. Notice currency went to 7.0 trillion and not 9.2 trillion (800 billion plus 2.2 trillion plus 6.2 trillion). Thoughts?
June 16th, 2013 at 6:18 pm PDT
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One of the trickier aspects of helicopter drops are potential frictions in the programs themselves (people don’t like them, thus administration costs may be much higher). Plus, where frictions exist, unfortunately these are often the better programs we could be utilizing in the first place! Where little friction exists (of course Social Security was the best example possible for good benefit)chances are the benefit ultimately flows to special interests which, as you say, can capture the better part in the long run.
http://monetaryequivalence.blogspot.com/2013/06/direct-skills-arbitrage-is-natural.html
June 16th, 2013 at 7:28 pm PDT
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Consider a very simple gold-standard central bank with currency at its only liability, and riskless overnight loans and gold as its only assets. (The bank has no capital). The bank CEO goes insane and starts dropping currency out of helicopters. What happens?
The bank’s assets haven’t increased, but its liabilities have. The only way to bring them back into balance is to devalue, i.e. raise the price of gold. Otherwise there will be a run on the bank.
This helicopter drop is *not* a fiscal operation. However, if the bank had devalued without the helicopter drop, then it would have had more gold than it needed and could have paid out its excess gold as a dividend to the government. So we could think of it as having a fiscal component (the helicopter drop) and a monetary component (the devaluation).
The helicopter drop “pays for” itself. No increase in the national debt. But it does more than that. It also reduces the real value of the national debt. So a $1 helicopter drop actually “pays for” *more* than $1 of spending.
Ok, so what does any of this have to do with our current monetary system? Modern central banks don’t target the price of gold, instead they target a price index. But the concept of devaluation is still applicable even though the medium of account is CPI rather than gold. The central bank devalues by simply announcing a higher CPI target. The act of devaluation results in the “permanent” money base (the part of the base that always pays a below-market rate of interest) growing. Because a devaluation is an unexpected inflation, it also reduces the real value of the public debt.
June 16th, 2013 at 8:18 pm PDT
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Consider a very simple gold-standard central bank
No thank you.
June 17th, 2013 at 12:00 am PDT
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“However, this piece is mostly concerned not with fiscal costs in an accounting sense, but the real cost of fiscal policy… Fiscal policy that does not put pressure on nominal expenditures and so force an inflation/interest-rate tradeoff is still fiscal policy, still “costly” in a government accounting sense, but has no real cost in terms of diminishing resources deployed for future growth.”
I sense the accounting straw/boogey man.
The proper contrast IMO is not between accounting and real, but between monetary and real, with accounting being omnipresent.
Whether or not the “helicopter drop” results in pressure on real economy capacity constraints and inflation, a directly associated result will be evident in the accounting for the monetary economy. And the accounting includes balances and interest rates. The H drop will be associated with some interest rate paid on incremental government debt, or on incremental bank reserves, depending on the drop mechanics. The ensuing interest rate may tell the tale of the real cost. The rate will either remain low, mirroring muted real cost changes, or it will start to move up, indicating real cost increases.
Either way, tracking the real cost at all times is inextricably woven into the accounting framework for the associated monetary effect, whether or not the real cost starts to increase at a point in time.
Not just semantics, particularly from the PKE perspective I would think.
June 17th, 2013 at 2:38 am PDT
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When market monetarists play the board game Monopoly, are they able to keep playing indefinitely by using the house rule of NGDP futures that summon up “expectations” to drive endless lending to the hopelessly indebted? If so please give details of that as it would clarify what at present seems abject nonsense.
June 17th, 2013 at 6:24 am PDT
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[…] A quick note on “helicopter drops” Interfluidity […]
June 17th, 2013 at 6:56 am PDT
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“an inflation- or NGDP-targeting central bank would be forced to raise interest rates to persuade some people to hold rather than spend the new money”
This is actually a policy choice. People talk about the CB being “forced” to raise interest rates when what they actually mean is the CB chooses to raise interest rates because their theories tell them that this is the right thing to do.
The problem with this policy choice is that if the government is running large deficits, higher interest rates actually increase the amount of financial assets received by the non-government sector, and thus increases the ability to spend.
As such, a policy of raising interest rates, supposedly to control inflation, could actually increase inflationary pressures in the future.
June 17th, 2013 at 7:35 am PDT
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[…] There are lots of good reasons to favor “helicopter drop”* style fiscal policy over monetary policy. Mostly, monetary policy ends up working through real estate. Real estate has huge problems as a macroeconomic stabilization tool. It ends up forcing us into a real estate monetary standard, which of course would have problems. Of course, fiscal policy has problems too, but helicopter drops seem to avoid most of the biggest problems with using fiscal policy. […]
June 17th, 2013 at 12:02 pm PDT
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JKH: Thanks for stepping in and putting an end to the insanity. Helicopter drops are fiscal, and once again, we find ourselves at the last refuge of a Monetarist.
SRW: Why not take the actual logic all the way to its conclusion?
If a person takes a $100 bill dropped from the Government helicopter and puts it under their mattress, what preference have they revealed for that money? I would argue that their treatment of the money reveals a preference for savings. So why not call fiscal additions or subtractions what they are, the enablement (or disenablement) of households sating their savings desire?
And also, why do you define Government spending as fiscal? Government anti-spending (taxation) is equally fiscal. Why give more, when you can simply take less?
It’s quite remarkable that you can write a piece this long and never mention MMT at all. Maybe when “monetary” has been completely redefined as “fiscal”, MMT will have finally won with their name never being uttered by mainstream economists.
And I take issue with your characterization that “It’s all very fun to draw lines and spit across them. But letting differences divide “monetarists” and “fiscalists” is letting divergent conceptions of perfect become the enemy of the good.” That’s a cheap. There is a true vs false element here, and academmic macro (Sumner, Krugman etc.) just have it wrong.
June 17th, 2013 at 3:17 pm PDT
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Targeting MEDIAN per/capita NGDP, I’ll coalesce around.
Taregeting NGDP is a pathway to even more acute income and wealth inequality.
June 17th, 2013 at 5:50 pm PDT
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“That convention is unfortunate, as it obscures the clear intention of Milton Friedman’s original thought experiment, which involved helicopters and dollar bills and no government spending at all.”
No spending at all? So the $16 trillion of new U.S. debt the past 20 years was just counterfeiting? (God, what a plank)
When Ben Bernanke implemented the strategy, he never told us that the virtually-interest-free-money-created-through-new-debt was only going to be dropped over the banks. When was the last time anyone gave you a 0.25%APR loan?
June 17th, 2013 at 9:58 pm PDT
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And thank you, Winterspeak, for saying so well what has been on my mind about this and similar posts elsewhere.
The problem with Yglesias, DeLong, Duy, the Market Monetarists (Sumner, Rowe, Beckworth) is that the monetary policy they advocate doesn’t seem to work. One by one, they’re beginning to acknowledge this, but in excruciatingly bizarre narratives.
Somebody has to say it– MMT is right on the economics. The market monetarists are wrong. To blame Bernanke or anyone else for pointing this out (see Matt Yglesias, for example) is unfair or, as Winterspeak says, a cheap shot…
June 18th, 2013 at 4:20 pm PDT
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In the UK, the term “helicopter money” seems to be being applied to simply writing off government debt, either existing or putative, held by the central bank: http://www.ft.com/cms/s/0/30e2679c-6fa4-11e2-956b-00144feab49a.html#axzz2WbaNerZB
As popularised by Lord Turner, its alternative name is “overt monetary financing”. He seems to be suggesting that even permanent write-offs may not be inflationary, because their size could be set by an independent central bank which would retain its inflation credibility. I therefore find it hard to believe that this would make any real difference. Certainly, there are a lot of silly, and perhaps some disingenuous, suggestions made by people who do not follow the consequences of such policies through to their conclusions. My idea of a helicopter money drop is that of a roughly per capita scatter of base money which is declared to be permanent by being allowed to impact fully on the price level.
But I find all this like listening to a medieval debate about angels on pin heads. Helicopter drops are not only fiscal, but redistributive (a truly non-redistributive allocation would be in proportion to existing holdings of money, like shifting the decimal point one place to the right in all monetary values). They represent a covert tax on the holders of money claims. Why such an already abused group (abuse which made a major contribution to the financial crisis if you ask me) should be further milked, I do not know, but if you want redistribution, be honest about it and propose a tax on whoever you think should pay more, and put it to the voters. Helicopter drops of money should not be discussed in decent society.
June 19th, 2013 at 3:42 am PDT
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