Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 26 February 2015

Can helicopter money be democratic?

Helicopter money started as an abstract thought experiment: money would be created and just distributed to individuals by helicopter. If we think of a consolidated government which includes its central bank, then it is clear that in technical terms this is a combination of monetary policy (the creation of money) and fiscal policy (the government giving individuals money). Economists call such combinations a money financed fiscal stimulus. With the advent of Quantitative Easing (QE), it has also been called QE for the people.

Some have tried to suggest that central banks could undertake helicopter money for the first time without the involvement of governments. This is a fantasy that those who dislike the idea of government have concocted. Others who dislike the idea of fiscal policy have suggested that helicopter money is not really a fiscal transfer. That is also nonsense.

Helicopter money is a particular form of money financed fiscal stimulus. It has two key features among the class of all possible money financed fiscal measures. The first is that it involves a particular kind of fiscal policy. A helicopter would distribute this fiscal transfer randomly, but what most people have in mind is an equal distribution to every person (adult?) - a kind of reverse poll tax, or what economists would call a lump sum transfer. The second is that, once the apparatus for helicopter money had been established by the government, its use would be initiated by the central bank, whereas other fiscal transfers are initiated by the government.

I want to suggest that it is this second aspect that is critical. You could imagine the government making a transfer to every person, and you could also imagine the central bank distributing money to only those people who paid income tax the previous year. The fact that helicopter money is initiated by the central bank seems more like a defining characteristic. If helicopter money could be ordered by the government, we would say that the central bank was no longer independent.

This defining feature of helicopter money is also what makes it attractive from the point of view of macroeconomic stabilisation. It removes the Achilles’ heel of the consensus assignment. The consensus assignment allocates demand stabilisation entirely to monetary policy run by independent central banks, while fiscal policy’s role at the aggregate level is to focus on deficits and debt. The Achilles’ heel is that interest rates can no longer be used to control demand when they hit their lower bound. QE tries to fill that gap, but helicopter money would be much more reliable and effective. Of course governments could make the transfers themselves through deficit finance [1], but the evidence of the last few years is overwhelmingly that they become fixated with reducing deficits in a deep recession with the result that we get fiscal contraction rather than stimulus.

This last point raises a potential problem with helicopter money, which is that government may take the opportunity to offset its impact by raising taxes or reducing transfers, and we end up simply monetising part of government debt. One would hope that does not happen for three related reasons: first, governments are rather less agile than central banks, second, good governments should be working with fiscal rules that specify a medium term plan for deficits, and third the monetary stimulus is only temporary, so there would be little long term benefit in terms of deficit reduction if governments tried to play this game. [2]

If initiation by the central bank is the defining feature of helicopter money, and this policy always requires the cooperation of government, might it be possible to imagine a form of helicopter money that was more ‘democratic’? Why could the central bank not give the government the money, on condition that it was used to increase transfers or reduce taxes in some way? A left wing government might decide that, rather than giving money to everyone including the rich, it would be better to increase transfers to the poor. A right wing government might decide it should only go to ‘hard working families’, and turn it into a tax break. We could call this democratic helicopter money.

I can see two problems with democratic helicopter money. Suppose the government decided to use the money for a tax break that went to people with a very low marginal propensity to consume. If the central bank fixes the scale of the monetary stimulus beforehand, it makes that stimulus much less effective. If it increases the size of the stimulus following the government’s decision on how to spend it, this gives perverse incentives to government: think of inefficient ways to stimulate the economy, and we will give you more money.

One way to reduce such problems is for the central bank and government to cooperate over the size and form of any money financed fiscal stimulus. This could have added benefits. Most studies, and theory, suggest that the most effective fiscal stimulus tool is to bring forward public investment projects. With democratic helicopter money, the central bank and government could cooperate on this policy, rather than or as well as implementing a tax cut or transfer. However such cooperation creates a second potential problem, which is that it puts at risk the perception (and perhaps the reality) that the central bank was both independent and non-political.

Given these problems, why even think about democratic helicopter money? One reason may be political. A long time ago I proposed giving the central bank limited powers to make temporary changes to a small set of predefined tax rates, and I found myself defending that idea in front of the UK’s Treasury Select Committee. To say that the MPs were none too keen on my idea would be an understatement. Making helicopter money democratic may be what has to happen to get politicians to support the idea.

[1] Combined with QE, this could become a money financed fiscal stimulus. An alternative way of avoiding this deficit fixation is to get governments to adopt a fiscal rule where, when interest rates were likely to hit the lower bound, the central bank in cooperation with the fiscal council proposes increasing the deficit by adopting a fiscal stimulus package of a particular size. This is the proposal in Portes and Wren-Lewis (2014). If instead the stimulus package was money financed, it becomes helicopter money.

[2] None of these considerations, even collectively, rule out the possibility that governments could negate helicopter money in this way. This point and the previous footnote show that all we are really talking about here is the effectiveness of different institutional mechanisms of persuading governments to allow fiscal stimulus in a recession, and to avoid the adoption of austerity. 

53 comments:

  1. "Some have tried to suggest that central banks could undertake helicopter money for the first time without the involvement of governments. This is a fantasy that those who dislike the idea of government have concocted."

    The central bank is an aspect of the government. Independent heli's doesn't mean you hate government it just makes heli's easier to perform. No need to negotiate with the government proper. No budget constraint of fiscal gov to be concerned with either.

    Heli's performed with fiscal cooperation may undermine central bank independence too.

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  2. If a rough assumption is made of 40 million adults in the UK and helicopter money as a tax free allowance of GBP1000 to every adult 18 and over resulted in GBP 40 Billion injected into the economy what is the projected effect on the economy. You must have some idea.

    I think the rules of distribution are important. The proposal above could mean several thousand going into one household and only one thousand to another household. So a lot would need to be discussed on these rules.

    But the point is what is the projected effect of a 40 billion money financed fiscal stimulus. Inflation, GDP, Interest Rates, Employment, Unemployment, Trade Surplus, Current Account, and other major economic indicators.

    You can alter the amount of the injection if you so wish for variation of effects.

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  3. Simon, what excatly would be the big problem with a central bank just having a list of citizens and their bank accounts (perhaps supplied by the country's tax revenue service) and then just transferring helicopter money on its own?

    As you've said governments are not agile enough to exactly offset the inflow helicopter money with higher taxes, and even if they offset some of it there would still be higher inflation and less borrowing/faster decrease of debt than in a scenario with no helicopter money at all.

    Is the big problem that the central bank would end up with a negative balance sheet? If so, isn't any unilateral form of helicopter money off limits (but surely you, Simon, understand this so you must have a trick up your sleeve to deal with this problem)?

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    1. Fiat money isnt a liability. Theres no promise to pay anything. If money is issued to people it should be recognized on BS as a form of equity not liability.

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    2. You would almost certainly find that no existing register would include the precise population you would want to include in the transfer. That would mean setting up a new register and then maintaining it on an ongoing basis just in case you wanted to create further helicopter money in the future.

      That would require the equivalent of a national identity register. The last Labour government tried to create something like this for more general purposes but found that it was hugely expensive and would take years to set up. The current government stopped the project as it was seen as too ‘big brother’ as well as being too expensive.

      “Some £250m was spent on developing the national ID programme over eight years and its abolition will mean the government will avoid spending a further £800m over a decade”

      http://news.bbc.co.uk/1/hi/8707355.stm

      It would make no sense whatsoever to allow the CB to administer an occasional transfer on this basis. It would be much more practical to use existing government registers. That would, in effect, turn such a transfer into a set of fiscal transfers e.g. tax cuts for some, benefit payments for others.

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    3. @Jamie

      Surely you'd already get very far with a list of pensioners, people who filed taxes and people who receive for housing/child/etc... subsidies, unemployment benefits and/or welfare? Perhaps you'd "only" reach 95% of all adult citizens but that's more than enough for the advantages of helicopter money over QE to come into play. Also don't forget other countries have more detailed lists of their citizen's bank accounts to even if the plan isn't feasible in the UK it might be in those countries.

      @CMA

      I'm not sure I'm following you. It was my understand that central banks always "buy" some form of collatoral in echange for money they issue. This collatoral may be government bonds or various form of bank assets, with the latter representing only a fixed fraction of the fiat money, but nevertheless a >0 fraction. I just wonder what the equivalent of that collatoral in a helicopter money operation would be (of course the central bank might offer fractional reserve banking to private savings account holders but that would of course be an incredibly unequal distribution, not to mention risky). What is Simon's plan for this?

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    4. Anonymous

      Money is a financial asset which can be recognized as equity or debt. If no liability is involved then recognizing this instrument as debt is incorrect. If corporations can issue equity to their shareholders CB's can issue equity to their constituent.

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    5. The central bank's balance sheet is a fiction, because money is not really a liability. However what the central bank might want to do is obtain a commitment from the government to recapitalise it if that ever became necessary - see my last post on helicopter money. You can think of that commitment as an asset if you like.

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    6. “Perhaps you'd "only" reach 95% of all adult citizens but that's more than enough for the advantages of helicopter money over QE to come into play”

      What about the other 5%? Why would it be fair to give money to most people but not all people? Only the government should be deciding about dividing up the spoils. That’s fiscal policy.

      Also, the government already has the organisational and systems infrastructure to pay tax rebates and benefits. It makes no sense at all to create a completely new set of very expensive infrastructure, just so the central bank could make very occasional payments, when the government could make the payments with existing infrastructure.

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    7. "What about the other 5%?"

      Tough luck, all they had to do was register a bank account with the government, but they didn't. Also, it's not about what's fair, but about what's economically effective and even if it was about fariness, according to most people's ethics it's already more fair to give 95% of the people money instead of just the banks.

      I don't see why there should be a separate infrastructure. All that would be necessary would be the government handing over a data file that it already compiles every year anyway.

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    8. @MM (Simon)

      I see. Do you think the risk of having to recapitalize, multiplied by the amount that would have to be recapitalized, is lower, or at least not higher, when helicopter money is used instead of QE?

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    9. "The central bank's balance sheet is a fiction, because money is not really a liability. "

      Amazing. A wave of an economist's hand and accounting is dismissed. Nevermind that the government accepts so-called fiat money in tax payments, or that all central banks hold assets against the money they issue, or that if the central bank were ever shut down, its money would be redeemed for its assets.

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    10. Anon at 07:54. Its a good question, but I do not have an answer. Calculations could be done, although the estimates of the effectiveness of QE and the likely losses would be very imprecise.

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  4. Simon,

    Democratic helicopter money (DHM) as set out in your 4th last para is exactly what Richard Werner, Positive Money and the New Economics Foundation proposed in their submisstion to Vickers. See bottom of p.10 to 12 here:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

    Re the problem of the central bank being drawn into POLITICAL decisions, strikes me the solution is for the CB to state the amount of stimulus it thinks desirable in some sort of fairly simple units, e.g. “percentage increase in public spending spread evenly across govt departments needed to give the right amount of stimulus assuming ALL THE STIMULUS comes in the form of increased public spending”.

    If government then takes the POLITICAL DECISION to implement the stimulus in some other way, e.g. via tax cuts for the rich (which I’d guess would require the CB to dish out more money), then the CB could give advice as to the exact sum that would have to be dished out to the rich. Alternatively, some independent body (e.g. the IFS) could also offer such advice.

    In short, I suggest keeping the CB out of political decisions shouldn’t be too difficult.

    And finally, CBs’ decisions on stimulus are not entirely apolitical AT THE MOMENT. E.g. raising interest rates hits mortgagors and benefits savers.

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    1. But that risks a government deliberately implementing fiscal actions that had a limited demand impact, in order to get more money from the central bank

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    2. Simon: Yes you made that point in your article. But why would a government want to get hold of “more money” since that money is already allocated to “limited demand impact” items? I.e. if government use the money for something other than the latter limited demand items, they’d be breaking the rules of the game, and assuming the system was transparent, the electorate would know politicians were up to no good and could punish them at the next election.

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  6. This would be much clearer if you discussed all the different options for helicopter money and set out the pros and cons of each option. That would solve the problem that economists use ‘helicopter money’ to mean different things (as you indicate). It would also clarify the choices. Here’s a starter set of options.

    Option 1: CB prints money and deposits it in private bank accounts of its choosing. This is undemocratic and corrupt.

    Option 2: CB prints money and deposits it in private bank accounts in a manner that is fair to all. This is inherently political as you would need to define ‘fair’ and ‘all’ so it would be undemocratic if the CB made this decision on its own.

    Option 3: CB prints money and gives it to the government. CB decides how the government should spend the money e.g. give it to poor people who are most likely to spend it. This is still undemocratic. Also, the government could adjust the rest of its budget to move other money away from poor people and towards its favoured projects like giving tax cuts to rich people, so it wouldn’t work anyway.

    Option 4: CB prints money and gives it to the government. CB and the government decide together how to spend the money. This would not work as there is no way the government could be forced into any spending it didn’t already agree with. The CB could try to put terms on the gift if it didn’t like the government’s proposals. However, the government could simply refuse the terms and give the money back, so the CB would fail in its effort to stimulate the economy.

    Option 5: CB prints money and gives it to the government. The government decides how to spend the money. This is the only fully democratic option. Of course, even in this option, the government could just send the money back to the CB and tell the CB to use the money to cancel some of the government bonds it holds. That wouldn’t stimulate the economy. It would just monetise the debt. If the CB didn’t like this choice then we are back in option 4 and the government could just return the money to the CB. If the government decides to spend the money in the economy then it is not much different from what we have now with deficit funded spending + QE.

    Current option: The government starts the chain of events by issuing bonds to the private sector in return for money, and then spending the money. The CB then (at its discretion) creates new money, buys the bonds back from the private sector and returns subsequent bond interest to the government. As long as the CB holds the government bonds, it is effectively the same stimulus as option 5. It has the advantage over option 5 in that the CB could rewind QE at any time whereas it could not unwind an option 5 gift.

    I am sure that there may be other options. I am also sure that other people may see different pros and cons in my starter set of options. However, I suspect that ‘democratic control’ means that the government cannot be forced to do anything against its will. That includes retaining the services of any ‘independent’ CB governor who doesn’t play ball.

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    1. Option 2 is no more undemocratic than creating intentional inflation.

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    2. No, the inflation target is set by the government. The CB is merely an agent to achieve that target.

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    3. @Jamie

      Which countries are you talking about? The ECB and FED set inflation targets themselves, but even if they didn't helicopter money would not change the CB's role as "merely an agent".

      I really don't see how it would be so much worse and undemocratic to give each adult a lump sum compared to decreasing the worth of people's savings and pensions, or the reverse.

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    4. Ok. I am happy to be corrected. I was thinking about the UK where I thought that the government set the target. I don't think that it is democratic for the central bank to set its own targets. Part of the problem is that a CB which sets its own targets, and then fails to meet them, is not really accountable to anyone. Hence, the UK central bank is never seen to be failing. This means that there is no incentive for anyone to change from the status quo.

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    5. Here is the right option:

      A law is passed instructing the central bank to purchase debt from the Treasury up to a certain amount and then erase the accounting for this position on their books.

      The normal legislative/executive processes create everything else, cash management, after all is after the fact - you need cash when the bills come in, after the work, services, of checks have already happened. Its purpose is to pay for the additional spending that was already done.

      But SWL wants the term to mean "independent-ability" by the central bank itself, as determined by the central bank. OK, I think it is a nutty concept of what I think the republican form of self-govt means.

      But I just have to ask how many people make this decision at the central bank (5-10-15 people?), I need to get my consortium together to finance my "lobby" effort with these 5 or 10 people. Compared to the US situation and the openness of the legislative process, that is a whole lot fewer people to "influence" (for the 5 at the CB it's a bribe, actually). Perhaps the reason SWL feels that a group at the central bank, acting behind closed doors, is more or less the same thing on the govt side of it , indeed this may be the way a parliamentary form of govt works. So whether you influence 5 people at the CB or 5 in govt - it's the same thing as everything the govt introduces like this passes by definition of being the majority. Alas, I suppose he wants the CB to be the one authorized because he doesn't like the 5 people he'd confront in the govt (but thinks the 5 at the CB are more susceptible).

      Helicopter money: The administrative arm of the govt spends. When cash is needed to cover the ensuing bills, instead of freshly printing a public debt instrument and recording it on to ledgers among themselves, some entity prints the currency to pay the bills (no debt, no fictional accounts, as SWL properly calls them, imo - but the spending is done via the normal institutions).

      JF

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  7. With respect, this is not a very good idea.

    The reason monetary policy was allowed to be taken out of the hands of politicians was because there was, or at least there appeared to be, a reasonably broad consensus about how it should operate. Indeed the break down of, or the revelation that, there is no such consensus about monetary policy in some circumstances, has predicatively been associated with calls to re politicize monetary policy.

    In relation to fiscal policy there is a deep political divide about how it should operate during a recession. I agree that it should operate counter cyclically, but there is a a large body of opinion, perhaps even a majority, that to one extent or another disagrees. In such circumstances we cannot attempt to lock in one view or another by way of off loading the decision to a non political body - all that will do is politicize, or further politicize appointments to central banks.

    Abortion and the US Supreme Court might be a worrying comparison here.

    What needs to happen is that the fiscalists must win the intellectual argument and convince the next generation of economists that they are right on this issue. When that happens this next generation will over time take up positions of importance and influence and the public debate might slowly be shaped and eventually won in a similar way that the debate on monetary policy was won.

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    1. I think the situation is rather different. Those you call 'fiscalists' have won the intellectual argument. It is generally acknowledged that fiscal stimulus would be effective: e.g. see

      http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_5bfARfqluG9VYrP

      If there are doubts among a large number of economists, it generally comes down to whether governments might abuse any fiscal stabilisation role, or might be inefficient in acting. (Hence the near universal support for automatic stabilisers.) Those concerns may be addressed by helicopter money.

      The problem is largely with politicians and the media. So I think its up to economists to come up with schemes that can then gradually gather public support. We first need a debate at a technical level about what schemes might work, which is what this and other recent posts have been about.

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    2. The link shows a broader consensus than I realised existed. Only the public and political class are left to convince it appears. I think designing practical schemes has more value in that context not least because it is easier and is more useful to rally support behind a proposal than a point of view in an argument.

      Nonetheless I remain concerned about the purpose for which you seek to have fiscal policy removed from politics. In the case of monetary policy I believe there was a literature on the political business cycle that suggested that there was what was effectively a principal agent problem between politicians and the public at large that justified a disconnect. In this case the alleged disconnect is not that the self interest of politicians is structurally set up to oppose the public interest, but, instead, appears to be simply that there is a disagreement between technocrats and some politicians about what the public interest actually is. That's a difference not of degree but of type.


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    3. It is true that macroeconomists made much of time inconsistency issues to justify central bank independence, but I think public acceptance came from the idea that this was essentially a technical matter which politicians could interfere with for their own advantage.

      The problem I see is a bit different. With monetary policy we could see mistakes being made over quite short time horizons, and we had examples of two major independent central banks that seemed to work. In this case we are talking about hopefully much less frequent events (hitting the ZLB after a large negative shock), and no examples of how helicopter money could work in that situation.

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  8. "QE tries to fill that gap, but helicopter money would be much more reliable and effective."

    Simon, you're assuming not just helicopter money, but heli money combined with an increase in a central bank's inflation target, right?

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    1. That is a separate issue. What I am talking about is why it has taken so long to recover from the Great Recession. This is largely a result of fiscal austerity, which central banks have been unable to offset with their existing instruments.

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    2. I get that it's a separate issue. My question isn't a criticism, just trying to verify my understanding of the details from your many helicopter posts up till now.

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    3. I fully understand the confusion, which probably comes from a change in my point of view. My initial posts on helicopter money aimed to show that this policy was equivalent to either fiscal stimulus or changing the inflation target, and that those advocating helicopter money should say this. In effect I was saying, why not just push for fiscal stimulus (and maybe higher inflation in the short or long term).

      The change is that I have become much more pessimistic about any such push, and fear that after the next crash we will go through all the same arguments again, but governments will ignore the arguments again. As a result, I have become much more sympathetic to delegating this fiscal stimulus role to the central bank, which is what I see as the essence of helicopter money, as I explain in this post.

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    4. Exactly! That is why it is so important for fiscal stabilizers to be *automatic*. At the time you need them the most, the public is most easily swayed by nonsense arguments like, "in these tough times, when families are tightening their belts, governments should do the same." Sounds so wise, but it's so wrong, hence the need for NGDPLT + automatic fiscal stabilizers.

      -Ken

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  9. What has rational economics to say about governments which irrationally obsess about reducing deficits in a deep recession?

    Where does "become fixated" sit in rational economics?

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  10. This post goes right to the heart of what I think all advanced governments should be doing to stabilize their economies:

    1) switch to NGDPLT;

    2) set up automatic fiscal stabilizers that transfer new cash to taxpayers whenever NGDP drops too far below target for too long

    I would think all reasonable economists (everyone besides hard-line Austrians and Neoclassicals) should support such a plan. We need to make this happen. I stand by ready to fund efforts along those lines.

    Kenneth Duda
    Menlo Park, CA
    kjd@duda.org

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  11. You say that much of the need for helicopter drops is due to governments being too scared of deficit spending. I wonder whether some of that fear could be allayed by more vocal and widespread refutations of some of the fears politicians express. I've heard Nick Clegg on the news several times saying that austerity was something we had to bear because if we didn't tackle the deficit then we would be burdened with sky high interest rates. He did not seem to realise that the Bank of England was not only setting short term interest rates but had been doing QE in excess of what would have been needed to peg long term rates to as low as they liked.

    It really came across as simply being pure ignorance of the mechanics of it rather than being some sort of political maneouver. I guess the Tories did want to pare back the state and used deficit reduction as a pretext for that but I don't think that explains Nick Clegg.

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    1. I have always suggested that the LibDems were panicked into supporting austerity by the Eurozone crisis. There are plenty in his party who have tried to enlighten him, but perhaps he just listens to the wrong people (or perhaps he feels committed to the policy he adopted). However I cannot help be pessimistic about the ability of economists to get their views across, simply because exactly the same problem has arisen in the US, the Eurozone and elsewhere.

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    2. Perhaps more stridently making the case that the euro is broken by design would make it clearer that our currency set up isn't like that and so we don't have those same worries?
      I worry that there is too much politeness about how bad the euro arrangement is and why.

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    3. This is a good point and one which illustrates my ongoing problem with Simon’s views.

      Simon’s story is that George Osborne does not do the sensible thing because of ideology rather than ignorance. That may or may not be true. However, if we assume that it is true, then economists can blame the failure of politicians to listen on the politicians.

      Clegg is an interesting case because he is not ideological. I saw him being interviewed recently and he didn’t know the difference between deficit and debt. It seems to me that the challenge for economists is to find a way of getting Clegg (and the millions of other people who know no better) to understand how the economy works. Unfortunately, academic economists of all political stripes always blame everyone else for the fact that hardly anyone understands how the economy works.

      Simon thinks that he can improve policy by ‘getting round’ political ideology. However, I think that he needs to find a way to improve the economic understanding of non-economists in general. That means that the best approach is probably to improve economics education in schools and to find an economic equivalent of Brian Cox (physicist) who can explain difficult concepts in a way that appeals to a mass market including politicians like Clegg.

      Einstein had more success in explaining relativity to the masses than economists have had in explaining economics.

      If the LibDems lose power in May then I will be interested to read Vince Cable’s memoires as they may explain the government’s decisions from the perspective of someone who understands economics and is almost certainly sympathetic to Simon’s views.

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    5. Credit is due to SWL for using this blog to try and educate us about this though - thanks!

      Perhaps one of the best goes at mass education I've seen was from the Bank of England:

      http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

      I wish that document was trumpeted more. Perhaps a start would be if all politicians, journalists and news presenters who delt with the economy knew it back to front.


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    6. Stone is absolutely right about the BOE bulletin, it is fabulous and I put it up on blogs some too.

      I also commend SWL on blogging on this topic.

      I have my bias - I think primarily the importance of doing this is to de-mysticize things. When a bill is to be paid, do I get the cash (so to speak) by 1) taxing, 2) borrowing or 3) just printing it? We can do all three. Can't just do 3), can't just do 2) alone. At certain times you may not be able to print what you'd like (see the Weimar hyper-inflation).

      When you consider that banks create money and the central bank can do it too, why can't the govt do it too - it is mythology that it cannot do all three.

      I'd focus on the mythology surround the three ways to get cash to pay bills. That is a less confusing talk, I think.

      It is a separate matter to discuss what it means for a central bank to be independent of whomever.

      JF

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    7. Stone is absolutely right about the BOE bulletin, it is fabulous and I put it up on blogs some too.

      I also commend SWL on blogging on this topic.

      I have my bias - I think primarily the importance of doing this is to de-mysticize things. When a bill is to be paid, do I get the cash (so to speak) by 1) taxing, 2) borrowing or 3) just printing it? We can do all three. Can't just do 3), can't just do 2) alone. At certain times you may not be able to print what you'd like (see the Weimar hyper-inflation).

      When you consider that banks create money and the central bank can do it too, why can't the govt do it too - it is mythology that it cannot do all three.

      I'd focus on the mythology surround the three ways to get cash to pay bills. That is a less confusing talk, I think.

      It is a separate matter to discuss what it means for a central bank to be independent of whomever.

      JF

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  13. I expect I am wrong, but I am really not convinced that anyone, other than economists (and probably central bankers) pays the slightest attention to whether central banks are independent of politicians or even believes that they are. Given politicians appoint their Boards, and set the operating parameters, I'm not sure that I think they're independent, either.

    Lord King's interventions, before the last election, calling for more austerity in terms virtually identical to George Osborne, was the give-away for me. Central Banks and the Bank of England in particular may well be, or act, independent of leftish governments. They do not seem to be independent of right wing ones, probably because they see themselves as defenders of the banking and finance sectors rather than of the overall economy.

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  14. Britain has used helicopter money extensively since 2011 as customers who complained about the way they were sold PPI have been paid £17.7bn. With cashing-in of pension pots soon to follow this has been the mainstay of Osborne's policies to boost aggregate demand. And it's worked! Has it been fair - well probably.

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  15. If the problem is that fiscal policy trumps monetary policy .. would it be an idea for central banks to simply concentrate on openly cancelling government debt. Thereby removing worries about the deficit, and freeing government to loosen its fiscal stance? The current versions of QE always want to camouflage as much as possible that some level of monetisation of debt is occurring. Making the messaging clearer could attack the deficit-bogeyman that seems to dominate political thinking.

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  16. I have doubts about Simon’s claim that “Most studies, and theory, suggest that the most effective fiscal stimulus tool is to bring forward public investment projects.”

    First, it is not easy to switch on “public investment projects” at the flick of a switch.

    Second, such projects tend to last for YEARS, i.e. they tend to stoke the next boom as much as help us recover from the current recession.

    Third, I looked at the abstract of the paper linked to in the above sentence (the word “studies”), and the paper seems to make the ever popular claim that there is some merit in types of public spending with a high multiplier. The flaw in that artument is that (at least under the system dealt with in the above article, namely where the state simply creates new money and spends it) that money is FREE. It costs nothing to produce. Thus addition to GDP per pound of that money is irrelevant.

    ReplyDelete
  17. There is ample evidence that money sits idle in a liquidity trap and you risk secular stagnation as long term unemployed become unemployable.

    Why not set up an infrastructure bank. It is indepent and its mandate is to develop shovel ready projects. Repairing roads and schools is popular. Normally it's funded by the government.

    But in the case of ZLB in a slump the Fed may drop heli money on it. You put people to work and increase demand, createing velocity needed to escape the slump.

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    Replies
    1. The debate so far remains predicated on the ZLB being a constraint on a willing CB, and a freedom for an unwilling Treasury. The secular stagnation hypothesis says we here to stay. If this is really true and if as a polity, however short sightedly, we have chosen to protect the interests of creditors over all others and ward off the necessary financial repression then no form of helicopter money can work, either on or off balance sheet until we throw Milton Friedman and Monetarism out of the helicopter for good and not just at the ZLB.

      Delete
    2. Anon,

      Every time there's a recession, at least ten thousand people appear from nowhere advocating public sector investment as a solution. As I pointed out above, such projects tend to last YEARS, thus they're as likely to stoke the next boom as cure the current recession. Second, sudden expansions in public sector investment type activity (or any other sector of the economy) are frequently not possible because of shortages of relevant skilled labour and capital equipment.

      In short, BROAD BASED stimulus is much better than any sort of NARROW based stimulus.

      Delete
  18. Marshall Auerback wrote The Real Lessor of the Great Depression: Fiscal Policy Works, showing that the unemployment in the U.S. fell from 25% to 9.6% between 1933 and 1937. And during the WWII mobilization government employment increased the labor force by 40%, raised GDP in six years by 75%, and established savings accounts in most households so that demand was triggered when the war was finished. If the projects during the war had been devoted to lasting (not exploding) products, then the production would have been of greater or lasting value. Sidewalks on the streets still say WPA 1937 where I live, libraries, city halls, airports, and miles of roads, etc. are still in use. Here's a study on comparative safety nets across nations, somewhat similar to the topic at hand: http://www.epi.org/publication/ib339-us-poverty-higher-safety-net-weaker/

    ReplyDelete
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