Austerity and Economic Hyperbole

Chris Dillow thinks that talk of policies leading to disaster is overdone, which is surely true. However he also says “I don't think the claim that austerity has depressed economic activity is a counter-example here.” I disagree.

Consider the UK first. The OBR thinks that GDP growth was 1% lower in both FY 2010/11 and FY 2011/12 as a result of austerity. There are good reasons for believing that is a conservative estimate, but let’s use those numbers for now. They also think the impact of austerity in later years was small (remember Plan A was abandoned in 2012): others would argue that the effects of earlier measures might be more long lived, but again let’s ignore that possibility. In normal times if you reduce growth by 1% the level of GDP will quite quickly recover to the path it would have followed before the shock. However that usually happens because of monetary policy, and we are not in normal times when interest rates are at their Zero Lower Bound. So the impact of these two growth shocks on the level of GDP might be quite persistent. We know that GDP only started growing again in a consistent way in 2013, so it would be reasonable to assume that austerity caused the level of GDP be 2% lower in both 2011 and 2012. If we stop there (which is another very conservative assumption), that is a cumulative loss of GDP of 5% (1%+2%+2%).

Now if 5% of GDP does not seem a lot to you, it may be because it is easy to get punch drunk with figures about economic growth. Or maybe everything seems small besides the impact of the Great Recession, although in 2009 UK GDP fell by a bit less than 5%. But 5% of resources that have been completely wasted (because the unemployed disliked their forced leisure time, and firms’ capacity was idle) is a bit less than £100 billion, which is about £1500 for every man, woman and child in the country. If £1500 does not seem much to you, that probably says something about how well off you are.

If I think about the two other major UK macroeconomic disasters in the last 45 years, Thatcher’s monetarism and ERM membership, it is much harder to suggest that sums of this magnitude were wasted. Monetarism did bring inflation down quickly. This could almost certainly have been achieved in a more cost efficient manner, but it seems unlikely that the efficiency gain would have been as high as 5% of GDP. In other words, a recession may well have been required to bring inflation down. In addition during the ERM crisis large sums were lost defending an overvalued exchange rate, but in terms of the direct losses made by the Bank of England, at least someone else got that money, and maybe some of it is being returned right now! On neither of these occasions is it clear that anything like 5% of GDP was wasted. More generally, I would find it hard to think of another Chancellor (or any other minister for that matter) who clearly wasted a similar amount.

Numbers for the Eurozone are worse still. If model simulations are to be believed, we are talking about cumulated losses of around 10% of GDP and counting. I noted the continuing large output gaps in the Eurozone here. (I'm not aware of any model simulations that look at US growth without austerity, but I am sure they must exist.)

Finally remember that these output losses are completely unnecessary. Nothing of any importance has been gained as a consequence. So as far as austerity is concerned, I think strong language hyperbole is justified. 

   

Who is lying about UK budget plans? The OBR test.

Over the next five months you will be told by the Conservatives that Labour’s spending plans will ‘cost billions’, are unaffordable, will put the recovery at risk - I could go on and on. Is there any truth in all this? Well you can read what I and others have written, but that involves looking at lots of numbers which, even if you are an economist or economic journalist, takes time. So here is a very simple reason why you can ignore all these Conservative claims.

Some months ago Ed Balls asked the Chancellor if the OBR, which does all the government’s number crunching, could also look at Labour’s fiscal plans. Now the OBR is independent, and interrogates what the government tells it to make sure it is not being deceived. So they would do the same to Labour’s fiscal plans, if instructed to do so. If Labour’s fiscal plans really are irresponsible, or do not add up, here was an excellent opportunity to expose that using an independent authority.

George Osborne refused Ed Ball’s request. Now Osborne will say that there were various technical issues, and that such a move might damage the OBR’s impartiality, but remember that Osborne is the most political of Chancellors. If he saw a clear way to damage Labour’s economic credibility, do you think he would let such concerns bother him for a second? (The OBR’s equivalent in the Netherlands does this kind of exercise, and the Dutch political debate is much better as a result.) So there really is only one conclusion to draw. Allowing the OBR to cost Labour’s plans would have done Labour more good than harm.

So it really is that easy. Do by all means look at all the numbers (which come to the same conclusion), but if you want a simpler reason to ignore Conservative claims about Labour’s future plans, this is it. The OBR test is clear, compelling and correct. (And any fair minded journalist who reports these Conservative claims should at least note the OBR request and refusal.)

What about the other way around: is what Labour say about Conservative plans just fear mongering? In this case we do have OBR numbers, and they said about existing plans (which exclude Cameron’s conference tax give-away but also any additions to the coalition’s welfare cuts):

“Consistent historical data for RDEL [Departmental Spending] are not available over a long period, but the closest equivalent in the National Accounts implies that by 2019-20 day-to-day spending on public services would be at its lowest level since 2002-03 in real terms (based on whole economy inflation), since 2001-02 in real terms per capita and since the late-1930s as a share of GDP.”

To see what those numbers might mean in practice, let Rick start you off.

Update

At their press conference today where the Conservatives ‘costed’ Labour’s plans, Osborne was twice asked about the OBR refusal. According to the Guardian the first time he did not answer. The second time he said

“The OBR brought in an external reviewer last year. The review concluded that it was not right to let the OBR audit opposition spending plans now. But this can be looked at in the next parliament.”

Balls proposal was first made, and rejected, in October 2013. Kevin Page’s review was not published until nearly a year later, so will not have been the basis of Osborne’s rejection. [1] Osborne’s reply is interesting – he is not rejecting the idea in principle, but just for now. Now it is true that the OBR is relatively young, and would need more resources to do this, but they are reportedly up for the task if asked. So my key point still stands. If the Chancellor really thought that OBR analysis would damage Labour, would he let caution and some small extra costs get in his way?

[1] Here is what Kevin Page’s review actually said:

“Given that the organisational underpinnings of the OBR are in their institutional infancy and are interdependent with a host of government departments and agencies, it is recommended that caution be exercised in considering the expansion of the OBR’s mandate (e.g. costing certification of opposition manifestos). The OBR may not have the organisational capacity to expand its remit without further drawing on the resources of other government departments. In addition, the particularly narrow legal framework of the OBR and its interdependencies with the executive branch may risk creating perceptions of conflicts-of-interest.”

The war with the banks has to be fought on two fronts

Trying to prevent another financial crisis was always going to require fighting on two fronts. The first, which gets most of the attention, is to change the rules and framework of regulation. That involves imposing higher capital ratios and leverage ratios, as well as restricting the activities that banks can engage in. Some progress has been made on that front. The second involves political change, and here I’m not sure any progress has been made. 

The banking sectors in most countries were responsible for the financial crisis. Increases in leverage on the scale shown here were just courting disaster. Big mistakes were made by regulators in allowing this, but the source of the problem was the actions of those in the financial sector. That crisis showed us that ‘too important to fail’ creates a huge market distortion, which mainly benefits those working in banks. The battle to change the status quo is therefore of huge importance.

I’m not an expert in these matters, but my impression is that some progress is being made on the first front. Banks have of course resisted much of this, saying that it would discourage lending and therefore hurt the recovery. Stephen Cecchetti argues that this has not happened. What has been hit is bank profitability, which indicates changes are having the desired effect. Cecchetti suggests as a result that more could be done, and this seems an understatement. Recent work by the IMF suggests that big banks continue to attract large implicit subsidies, while Admati and Hellwig present a well thought out case for much higher capital ratios. Until this happens, our money will continue to help fund bank bonuses.

So on the first front, some progress has been made but much more needs to be done.[1] However the recent case of Citigroup and the US congress illustrates all too clearly why we need a second, more political battle. [2] The story is very simple. The Dodds-Frank act that became part of US law in 2010 prevents US banks from using deposits to undertake certain ‘speculative’ activities. That was one of the victories on the first front discussed above. One of these speculative activities, and possibly the most dangerous in scale, is derivatives trading. On the 11th of December last year, as part of the last minute deal to prevent another US government shutdown, congress passed a provision that exempted derivatives from Dodds-Frank. The provision was based on drafting by the US bank Citigroup.

Why would Congress undo its own legislation in this way? The answer is not hard to find. US banks contribute huge amounts of money to fund the campaigns of those that run for congress, be they Democrat or Republican. It spends huge amounts on lobbying. Members of government often have or will work for these banks. Of course regulators can also be captured by those they are supposed to regulate. This could all be described as institutionalised corruption.

The only big difference between the US and the UK or Europe is that these things are a little more open in the US. City contributions make up a large proportion of Conservative party donations in the UK, and the other parties are hardly indifferent to wealthy donors who made their money in the financial industry. Lobbying is extensive and there are plenty of legislators with links to the financial sector. As Tamasin Cave notes, the UK comes second only to Switzerland for the number of people moving through the “revolving door” between the finance sector and officialdom. Whether Europe’s attempts to put a cap on bankers’ bonuses made economic sense or not, the fact that the UK Chancellor and Treasury were prepared to try so hard to prevent it happening shows who calls the shots in the UK government. Similar points can be made about the extent of lobbying and industry links in Europe.      

The Citigroup case shows how any immediate gains achieved on the first front can be steadily eroded by the political influence of the banks as the memories of the financial crisis fade. Now it might have been prudent from the US banks’ point of view to wait a bit before doing this so openly. Simon Johnson rather optimistically suggests that Citigroup’s blatant move may end up with its breakup. Alternatively Citigroup may just know they have the political upper hand. In the UK, it is difficult to know where an effective challenge to banks' political power will come from, and good reasons to think that any challenge would not be successful. [3] Such a challenge would be hugely popular, but more than popularity is required to counter the influence of money and power.

[1] In particular, the importance of simple regulation that cannot be gamed seems not to have been sufficiently appreciated.

[2] The case is unfortunately not an isolated example.

[3] An example of what UK governments can try and get away with in the interests of large corporations is provided by the case of Jeremy Hunt and News Corp. In November 2010 Culture Secretary Hunt sent a memo to the Prime Minister which began “James Murdoch is pretty furious at Vince’s referral to Ofcom.” That was Vince Cable’s referral of News Corp’s proposed takeover of BSkyB. The memo argued News Corp’s case. As Stuart Weir documents, Hunt was hardly a disinterested party in this. When Vince Cable was subsequently forced to relinquish his role in the affair because of comments he made to constituents, it fell to Cameron to appoint someone who was seen as more impartial. He appointed Hunt to take over. When civil servant Gus O’Donnell was asked to oversee the propriety of the appointment, Hunt’s memo was not disclosed to him. 

In defence of NGDP targets

For macroeconomists

Tony Yates had recently written a couple of posts (here, and here, but see also the discussion with Andy Harless on the second) slamming the idea of NGDP targets. (From now on I assume this refers to targeting the level of NGDP.) Now you might think that NGDP targets do not need any support from lukewarm advocates like me, given all the supporters in the econ blogging world. That would be wrong, because - as Tony rightly says - most advocates of NGDP targets tend to argue in a model free way. Both he and I want to stay close to the academic literature, at least as a starting point.

I think Tony is wrong when he says that “the case for levels based targets – including NGDP levels targets – is, both practically and analytically, extremely weak”. In making such a claim, Tony should be very worried that one of the supporters of NGDP targets is Michael Woodford, who literally wrote the book on modern monetary theory.

He rightly focuses on the big plus for any levels based target, which is that it can mimic the optimal but time inconsistent policy. After a negative shock to inflation, the central bank commits to future above target inflation which reduces the impact of the negative shock. This is useful in any situation, but particularly at the Zero Lower Bound. He has two arguments against this: one analytical and one practical.

The analytical argument is that in more complex models discretionary policy can yield multiple equilibria. I do not see why that is relevant. We are comparing policy that follows a rule (NGDP targets) with an optimal policy that assumes commitment.

His practical argument against NGDP is that it would be difficult to communicate. I think that kind of follows from its time inconsistent nature. So is Tony saying that the central bank can never follow a time inconsistent optimal policy? The whole point (in my view) of NGDP targets is that they try and directly address the communication problem. The welfare gains from following the optimal time inconsistent policy are large (see my discussion of Iván Werning’s paper for example), so to wave those away as ‘difficult to communicate’ seems - if I may say so - terribly old school central banking.

In a similar manner, Tony argues - again correctly - that these commitment gains depend on forward looking expectations. Under adaptive expectations, levels targets are costly. However central banks, alongside the academic literature, do routinely assume rational expectations in most of the stuff they do. Furthermore, a key argument for inflation targets is that agents are forward looking, and it is an argument that central banks frequently invoke. We need some consistency here.

One final argument Tony uses that really should not be made is that simple models show that inflation variability is about twenty times more important than output variability in assessing welfare, and therefore NGDP targets give too great a weight to output. (The link is a bit more complicated than that - I tried to sketch the maths here.) While these models may be a useful approximation to how the economy works (which is what they were designed to do), they are not a useful approximation to weighing the welfare costs of inflation variability against output variability (which they were never designed for). We know that from survey data and empirical work that looks at the cost of unemployment: I argue this case in detail here. These considerations suggest to me that targeting NGDP will give too little weight to output relative to inflation following shocks.

Having said all this, it is great that Tony is opening up the discussion on the correct level, so we can get away from what often seems like faith based arguments for NGDP targets. I think the framework that he seems to have in mind is also the correct one: the ultimate policy target would be inflation (and the output gap: I would want a dual mandate), and NGDP would be an intermediate target to achieving welfare maximising paths. So I hope this discussion continues. My one last plea is that arguments make clear whether a NGDP targeting regime is being compared to some form of optimal policy, or policy as currently practiced: as I suggest here these are (unfortunately) different things. 

How good has the UK recovery been?

In the next five months we will hear a lot about the strength of the UK recovery since 2013. Forget 2011 and 2012, certain people will say, it is finally coming good. To assess the validity of these claims, we can look at the latest ONS data for output per capita. It is important when comparing this recovery to previous experience to use GDP per capita rather than GDP, because population growth has been much more rapid in the last decade compared to the previous three. GDP per capita rather than GDP is a more relevant measure of average living standards. Here is the annual growth in UK GDP per head since 1980 (source: ONS).

The recession of 1980/81 was followed by years of over 2% growth. The ‘ERM recession’ likewise. In contrast, after the 2008/9 recession we have had a very weak recovery. Even growth in 2013 is well below the 1971-2007 average of around 2.2%. Only in 2014 do we seem to have got back to trend. Here are recently quarterly growth rates.

The trend quarterly growth rate is about 0.55%, so only in the last two quarters is there even a hint of exceeding that trend. So the best that can be claimed about growth so far is that we have in the last two years managed to return to trend growth. We have made no progress in getting back the ground that we lost in 2010-12, let alone recoup the ground lost in the recession.

Isn’t this true elsewhere? Only if we look at the Eurozone, which in 2013 also had levels of GDP per capita well below 2007 levels. In the US and Japan GDP per capita exceeded 2007 levels (just). So the UK has matched Eurozone performance, but without having to contend with an existential funding crisis.

Now maybe it might still be worth talking up the recovery if it included the promise of better times ahead. This could be the case, for example, if it had occurred despite a large rise in consumer savings, or because of a strong increase in net exports. Unfortunately in both cases the opposite is true: the current savings ratio appears pretty low, and our trade performance has been poor despite the depreciation during the crisis. This change in the terms of trade has also made consumers poorer than the GDP numbers would suggest.

So even if we exclude the years 2011 and 2012, this looks like a below par recovery by most standards. Economists who suggest otherwise are looking at their prejudices rather than the data. To what extent this is down to the government or something else is another issue. What it does suggest is that the government should be explaining why they have been unlucky, rather than boasting of their success.

On the Stupidity of Demand Deficient Stagnation

In my last post I wrote about “why recessions caused by demand deficiency when inflation is below target are such a scandalous waste. It is a problem that can be easily solved, with lots of winners and no losers. The only reason that this is not obvious to more people is that we have created an institutional divorce between monetary and fiscal policy that obscures that truth.” I suspect I often write stuff that is meaningful to me as a write it but appears obtuse to readers. So this post spells out what I meant.

First a preliminary. If you do not understand why economies can suffer from deficient demand, and why this is a needless waste of resources, then to be honest your best bet is to read a few chapters of a popular book on macro, like Tim Harford’s latest. If you have done a macro course and do not believe prolonged demand deficiency is possible, just tell me how you get out of a liquidity trap in a world with inflation targets after reading this post (and maybe this).

Demand deficiency when inflation is persistently below target (the stagnation of the title) should not occur, because it is easy to solve technically. If I was a benevolent dictator in charge of both monetary and fiscal policy instruments, stagnation would never persist in my economy. The way I would ensure this most of the time is by varying interest rates, but if nominal interest rates hit zero (a liquidity trap) I have a whole range of alternative instruments, ranging from cutting various taxes to increasing transfers or raising public spending. I know of no macroeconomic theory on earth which tells me that everyone of these instruments will fail to raise demand.

Whatever instrument I use to raise demand in a liquidity trap, I need to finance it. I can do this by issuing bonds (increasing government debt) or creating money. A higher stock of government debt or money is the only legacy (apart from happier people) of my successful operation to remove demand deficiency. We generally prefer governments to use bond finance, for reasons I will come to. But supposing there is some constraint (real or imagined) on issuing bonds. As a benevolent dictator I can just create money, which we call money financed fiscal stimulus. Money financed fiscal stimulus is a sure way of ending demand deficiency in a liquidity trap.

If that higher stock of money proves too great later on when the economy has recovered, I can reduce it by various means. There will be no subsequent above target inflation. There are no technical problems that I as a benevolent dictator need to worry about here. Of course creating lots of money on a temporary basis is exactly what central banks in the UK, US and Japan have recently done (QE - Quantitative Easing). The problem is that they have not been accompanied by sufficient tax cuts, increased transfers or increased government spending. Creating money to buy financial assets is by comparison to money financed fiscal stimulus an unreliable way of raising demand.

So that is it. Demand deficient stagnation is easy to prevent technically. The huge waste of resources that we see in the long and incomplete US recovery, the even slower UK recovery and the absence of recovery in the Eurozone are all unnecessary, because we know how to fix them. [1]

What stops this happening in the real world is that we have become fixated by the labels ‘monetary’ and ‘fiscal’ policy, and created an independent institution to handle the former. Central banks do monetary policy (varying interest rates and creating money) but are not allowed to give money directly to the people (helicopter money, or John Muellbauer’s QE for the people). Governments run fiscal policy, so can do bond financed fiscal stimulus, but are not allowed to create money. So a self-imposed institutional setup prevents either central banks or governments doing money financed fiscal stimulus alone.

A major reason why this institutional arrangement exists is to discourage non-benevolent governments creating inflation through fiscal profligacy, or more recently in order to increase policy credibility. Of course during a period of stagnation there is no danger of rampant inflation. Unfortunately this institutional arrangement creates a problem when governments – in my view for largely imaginary reasons - put a priority on reducing deficits. Money financed fiscal stimulus is not available to get you out of a liquidity trap. So we get this huge waste of resources.

Within the existing institutional framework, there is plenty to be done to convince fiscal policy makers that reducing deficits should not be a priority in the short term, or in trying to improve the monetary policy framework so liquidity traps happen less often. Yet it would be better still if we had an institutional framework which was a little more robust to failures on either front. We need to regain the possibility of money financed fiscal stimulus in a liquidity trap.

[1] What I say here has a lot in common with the advocates of Modern Monetary Theory. However, it also appears to be perfectly standard macroeconomics to me, so here I will simply commend them for highlighting these aspects of mainstream thought. 

The Eurozone Scandal

Imagine that it was revealed that 10% of the European Union budget (the money that goes to the EU centre to fund the common agricultural policy and other EU wide projects) had been found to be completely wasted as a result of actions by EU policymakers. By wasted I do not mean spent on things that maybe it should not have been spent on (rich farmers, inefficient farmers, infrastructure projects whose costs exceed benefits etc), but literally money that went up in smoke. Imagine the scandal. Heads would roll, and some might find themselves in jail.

10% of the EU budget is about 0.1% of EU GDP. Yet sums at least ten times that figure are currently being wasted in the Eurozone, as a result of actions by Eurozone policymakers. Here is the latest OECD assessment of output gaps across eleven Eurozone countries, for both 2013 (blue) and 2014 (red).

A negative output gap means that output could be the amount of the gap higher without raising inflation above target. Of course Greece is a nightmare, and things in the other PIIGS are really bad, but the output gap in the Netherlands is around 3%, in France over 2% in 2014, and even in Germany the output gap exceeds 1%. Estimating output gaps is an imprecise science, but gaps of at least this size are consistent with inflation well below target (currently 0.3%). So output could be at least 1% higher across the Eurozone with no ill effects. This is the equivalent of the entire EU budget going up in smoke.

Sometimes negative output gaps are the result of shocks which were not anticipated by policymakers (like the financial crisis). Sometimes they are engineered by policymakers to bring inflation down. It is unfortunate that these things happen, but they always have. However the output gaps we have in the Eurozone today are neither of these. Instead they have been created by policymakers for no good reason. That is why they can be called a scandal.

At this point you might think I’m being unfair. Surely this is all about tight fiscal policy required to bring down government debt. I agree that it is all about fiscal policy, and in particular the crazy fiscal rules imposed within the Eurozone. However where is the urgent need to bring down debt outside the periphery? The OECD estimate that the primary structural budget balance in the Eurozone will be a surplus at around 1% of GDP in 2014 compared to a deficit in the OECD as a whole of just over 1%. So even if you think that we need austerity to bring deficits down rapidly - which I do not - why should policymakers in the Eurozone be doing this so much more quickly than in the UK, US or Japan? To achieve this goal, they are wasting resources on a colossal scale.

If you think anything has changed as a result of Juncker’s ‘E315 bn’ investment plan, you should read this post from Frances Coppola. As she makes clear, there is not a penny of new EU money in this proposal. Instead money earmarked for existing projects is being used to provide insurance to private sector investment (which may or may not happen). There are so many issues with this kind of stimulus. Besides those raised by Frances, there is also the question of how to prevent firms simply getting insurance for schemes they would have undertaken anyway, and how exactly will the Commission select when to allocate its insurance. Those of a neoliberal persuasion who think government is bad at spending its money cannot feel any more comfortable with the government selecting what private sector projects to back. However a scheme like this will come as no surprise to someone like George Monbiot, who thinks states are increasingly being used to serve corporate ends. 

Equally embroiled in this scandal are those making monetary policy decisions at the ECB. Here I can simply defer to an excellent post by Ashoka Mody. In particular he points out why it is misleading to simply look at the ECB’s balance sheet as an indicator of the force of unconventional monetary policy. There is an important difference between creating money to bail out failing banks, as the ECB has done, and creating money to buy bonds to force down long term rates, which is Quantitative Easing (QE). He argues that the “ECB is set to remain—by far—the central bank with the tightest, most conservative monetary policy among the major central banks.” I thought I would quote the following paragraph in full, for reasons that will be clear to regular readers.

“Others play by the rules of the cognitive frame. Thus, despite the serious concerns with the June 5th measures—documented carefully by my Bruegel colleagues—journalists have no interest in asking ECB officials: “What exactly are we waiting for?” The financial markets have no interest in public policy: once the rules are set, they seek opportunities for short-term bets. On July 9th, the International Monetary Fund’s Executive Board somewhat incredulously concluded: “Directors welcomed the exceptional measures recently taken by the European Central Bank (ECB) to address low inflation and strengthen demand, as well as its intention to use further unconventional instruments if necessary.” Belatedly, on November 25th, the OECD became a lone official voice calling for more urgent steps.“

To those who say that QE, as operated by the BoE or Fed, would have limited effectiveness in the Eurozone, I have a lot of sympathy. However there is a relatively simple way of making QE much more effective and predictable, and that is for central banks to create money not to buy financial assets but to transfer directly to citizens, which Friedman called helicopter money. John Muellbauer calls this QE for the people. Conventional QE involves buying a large amount of assets with potential losses for the central bank (if the asset price falls) but uncertain effects on demand. Helicopter money involves small transfers with a certain loss to the central bank but much more predictable positive demand effects. [1]

As an institutional innovation, helicopter money has two major drawbacks in countries with their own central bank. [2] First, why innovate when you can implement exactly the same policy through existing means: in macroeconomic terms helicopter money is equivalent to QE plus tax cuts when you have inflation targeting. Second, a fiscal stimulus in the form of temporary additional government spending is likely to be more predictable in its impact than transfers or tax cuts, because you eliminate the uncertainty caused by how much of the transfer or tax cut will be spent.

But if countercyclical fiscal policy is effectively illegal in the Eurozone, these objections do not apply. QE for the people may have additional legal merits within the Eurozone. The ECB is constrained to some (uncertain) extent in its ability to buy government debt. But, as John Muellbauer suggests, mailing a cheque to every EZ citizen using electoral registers would seem to circumvent these legal difficulties.

One objection to the ECB embarking on ‘QE for the people’ is that it goes well beyond the remit of a central bank. [3] Yet the ECB appears to have no qualms on that score: besides routine references for the need for fiscal consolidation and ‘structural reform’, the letter discussed by Paul De Grauwe here shows the ECB requiring detailed changes to labour market regulations and institutions in Spain. So you have to ask why is it OK for the central bank to override the democratic process in this way, but giving money directly to the people is somehow beyond the pale.

If you think that mailing a cheque to every voter in the Eurozone as a solution to continuing recession sounds too good to be true, then you have just rediscovered why recessions caused by demand deficiency when inflation is below target are such a scandalous waste. It is a problem that can be easily solved, with lots of winners and no losers. The only reason that this is not obvious to more people is that we have created an institutional divorce between monetary and fiscal policy that obscures that truth. It was a divorce that did a reasonable job in steering the economy in normal times, and it might discourage fiscal profligacy when demand is strong, but since 2010 it has led to a scandalous paralysis in the Eurozone.  

  

[1] These losses are notional only, as the central bank is not in the business of making money. They matter only if they compromise the ability of the central bank to do its job of controlling inflation in the future. There are various ways that danger can be avoided, but my point here is that costs to the central bank can arise with any form of QE.

[2] Central banks routinely pass the profits they make (through seigniorage) to governments. So the innovation is that the central bank rather than the government decides how to disperse this money.  

[3] Another objection is that, because the ECB is free to define its own targets, changing the monetary policy framework to target the level of nominal GDP would be a better innovation. I agree this would be a useful innovation. I would argue that it would be better still to allow countercyclical fiscal policy, because only this can deal with country specific shocks. But if, for whatever reason, these changes are ruled out, then a helicopter drop should be implemented. If you are a market monetarist, think of it as an insurance policy.