Beckworth on the roles of monetary and fiscal policy

David Beckworth has a post discussing when it is appropriate to use fiscal policy:

Here is how I would operationalize this policy. First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.

This two-tier approach to NGDP level targeting should create a foolproof way to avoid liquidity traps. It should also reduce asset boom-bust cycles since NGDP targets avoid destablizing responses to supply shocks that often fuel swings in asset prices. This approach is consistent with Milton Friedman’s vision of monetary policy, would impose a monetary policy rule, and provide a solid long-run nominal anchor. Finally, per Cardiff Garcia’s request it would satisfy both fiscalists and monetarists. What is there not to like about it?

A curmudgeon like me always finds a few things not to like.  While I certainly agree with the thrust of David’s proposal, here’s how I’d tweak it:

1.  I think the first sentence of the second paragraph is slightly misleading, conflating two quite different situations. First, there is the zero bound situation. And second, there is the “Fed is out of ammo” situation.  They are quite different.  So I’d be inclined to say:

If rates fall to zero, and if the Fed sets IOR at negative 2%, and if the Fed buys all eligible assets, and NGDP expectations still remain below target, then go for fiscal stimulus.

I would add that eligible assets include T-securities and government-backed mortgage bonds, at a minimum.  I believe that’s around $20 trillion in eligible assets.  Recall that with IOR at negative 2% there are basically no ERs left in the system.  So unless the public’s appetite for $100 bills is much greater than imagined (greater than $130,000 per family), I think we can safely assume the Fed will never run out of ammo.  Nevertheless, if it will make the Keynesians feel better to have a backup plan. . . .

2.   What if we do need fiscal policy?  First of all, we won’t.  ”Yes, but what if we do?”  OK, OK.  I’m opposed to the helicopter drop idea, for several reasons.  First, it’s less effective than people think.  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.

Second, there are much better options than helicopters drops.  The fiscal authorities can overcome nominal wage stickiness by cutting the employer-side payroll tax.  This may not boost NGDP, but it will boost employment for any given NGDP level.  Then as NGDP recovers in the long run, the payroll tax can be raised again.

Helicopter drops must be reversed in the long run, at the cost of distortionary taxation.  Better to cut distortionary taxes today.

I believe that many people exaggerate the need for using “every available option” because they wrongly believe money has been easy in recent years, and then infer it hasn’t worked.  (Obviously these remarks do not apply to Beckworth.)

Yichuan Wang has an excellent new post showing that money was not easy in late 2008, at a time most people assumed it was:

The zero lower bound didn’t always bind. For three months after Lehman’s collapse on September 15, 2008, the federal funds rate stayed above zero. In this period of time, the Fed managed to provide extensive dollar swaps for foreign central banks, institute a policy of interest on excess reserves, and kick off the first round of Quantitative Easing with $700 billion dollars of agency mortgage backed securities. Finally, on December 15, 2012, the Fed decided to lower the target federal funds rate to zero.

It is important to remember the sequence of these events. It is easy to think that the downward pressure on interest rates was the inevitable consequence of financial troubles. Yet the top graphic clearly contradicts this. Each of the dotted lines represents a FOMC meeting, and each of these meetings was an opportunity for monetary policy to fight back against the collapsing economy. The Fed’s sluggishness to act is even more peculiar given that there were already serious concerns about economic distress in late 2007. As, the decision to wait three months to lower interest rates to zero was a conscious one, and one that helped to precipitate the single largest quarterly drop in nominal GDP in postwar history. The chaos in the markets did not cause monetary policy to lose control. Rather, the Fed’s own monetary policy errors forced it up against the zero lower bound.

Read the whole thing.

HT:  Paul and Marcos


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36 Responses to “Beckworth on the roles of monetary and fiscal policy”

  1. Gravatar of AldreyM AldreyM
    14. June 2013 at 13:49

    “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”

    Ouch…

  2. Gravatar of Rob Rawlings Rob Rawlings
    14. June 2013 at 13:56

    “Second, there are much better options than helicopters drops. The fiscal authorities can overcome nominal wage stickiness by cutting the employer-side payroll tax.”

    If they cut the employer-side payroll tax and don’t fund it by borrowing or spending cuts isn’t that a helicopter drop of the type Beckworth has in mind ?

  3. Gravatar of Brenb Brenb
    14. June 2013 at 14:09

    Scott, I’ve got some historical episodes you should write posts on!

    1. 1931 interest rate hike by the Fed after Britain left gold
    2. 2000 rate increase by the BOJ
    3. How could labour market tightness be the cause of 1970′s inflation? The female participation rate rose 8.5 ppt over the decade!

  4. Gravatar of Benjamin Cole Benjamin Cole
    14. June 2013 at 20:19

    Excellent blogging.

    Still, I sense far too much “prudence” on the part of MM’ers.

    If very aggressive MM does not work (though it should), do not send in “helicopters” to make “drops”

    Send in the B52′s, dude, to make gigantic bombing runs.

    Has anyone checked out Japan? Europe? Do you see where timidity gets you?

    The threat is not inflation (see the 0.7 percent current rate, btw).

    The threat is that once an economy slips on the ZLB ice, you won’t get it up again. Japanomics 101.

    Another word: Even in the 1960s, with a Fed that concluded it could not hold down inflation, and with heavy structural impediments we no longer have (telephone, banking, transportation regs, 91 percent top tax rate, a unionized labor force), inflation never got out of single digits.

    It was in single digits even then.

    The economy today is far less inflation prone.

    We are suffering from monetary asceticism for no reason.

    The Fed needs to print money much more heavily, and if that doesn’t work, then the Fed should keep monetizing debt while the federal government cuts taxes by a couple trillion dollars.

    Dudes, half-measures will not work.

  5. Gravatar of jknarr jknarr
    14. June 2013 at 21:11

    Eligible assets are part of the problem. Only government debt can feed base money? It’s a ridiculous constraint, and far too respectful of the equity owners of the Fed, whoever they are. I frankly do not care about the Fed’s assets — that’s their problem.

    Japanese M1 has been mostly pathetic for decades. Hence they have not really helicoptered — I define the success of the helicopter by its money creation, not its proverbial flights.

    Can we say that a helicopter dump is defined by the pace that it raises debt-free M1? Demand deposit growth in particular. By that definition, the Fed has been at least somewhat successful – that is, if US fiscal debt (future taxes) did not totally engulf and overwhelm recent M1 growth.

  6. Gravatar of Max Max
    15. June 2013 at 00:46

    If you’re going to be radical why not propose something that will actually work? And there are basically only two options:

    1) get rid of the zero bound
    2) devalue (i.e. raise the price level)

    (1) has never been done but nobody doubts it would work.

    An example of (2) is FDR’s raising the price of gold from $20 to $35. The modern equivalent of raising the price of gold is raising the price level target.

    Proposing to print unlimited amounts of money as monetarists like to is, at best, a roundabout version of option (2). If the central bank prints so much money that it destroys the balance sheet of the government, then it will be *forced* to raise the price level. But of course, the central bank would retreat before that happened.

  7. Gravatar of dtoh dtoh
    15. June 2013 at 01:48

    Scott,
    There is only a ZLB problem if you believe the transmission mechanism for monetary policy is HPE. When nominal rates are zero, money can be transformed from a medium of exchange to a store of value and… poof the HPE no longer works. Instead of the money being spent, it gets converted into a store of value primarily in the form of excess reserves.

    To use the apple analogy… normally when the supply of apples increases, prices of everything will rise relative to apples. Suppose however, that a) there is fixed demand for apples (people only hold the amount of apples they need for 7 1/2 weeks of dietary intake) and b) that apples can be transformed into gold. In this scenario, the excess supply of apples will be converted into gold and the price of everything will rise relative to the price of gold.

    This would be exactly analogous to monetary policy, if it were conducted via a helicopter drop at the ZLB.

    However because money is not dropped but rather is exchanged for financial assets (e.g. Treasuries) then the net effect of OMP is simply the conversion of one store of value (Treasuries) into another store of value (ER). There is no net change in the amount of the MOE (i.e. that portion of the Base not being held as ER or by drug dealers and tax evaders), AND there is no net increase in the amount of financial assets (Treasuries, etc. plus ER).

    So if your model for the transmission mechanism is HPE, then in fact the transmission mechanism does break down at the ZLB. That leaves you solely with expectations as your transmission mechanism (expectations of higher NGDP will induce increased consumption and investment, i.e. a marginal increase in spending on real goods and services – i.e. a marginal increase in AD). However expectations have to be about something…. there has to be a real transmission mechanism, and because the HPE model breaks down at the ZLB there can logically be no expectation of an increase in AD. (I think you can argue that higher inflation expectations will lead to an increase in V, but that is a different argument than HPE).

    Contrast this with a financial asset price mechanism model. Unless you reject one of the fundamental tenets of economics, i.e. that indifference curves exist and that they are downward sloping, THEN an increase in the real price of financial assets (1/real risk adjusted rate of return) relative to the price of real goods and services has to cause a marginal increase in the exchange of financial assets for real goods and services, i.e. a marginal increase in AD. In this model, the ZLB presents no problem because even though nominal returns are bounded by zero (assuming no negative IOR), there is no bound on inflation, and higher expected inflation reduces the real expected rate of return, i.e. raises the real price of financial assets resulting in a marginal increase in the exchange of financial assets for real goods and services (i.e. higher AD). Bingo..the ZLB is revealed for the myth that it is.

    The only question that remains is whether the Fed can raise inflation (and expectations thereof). If it can’t, then to make an reductio ad absurdum argument, the Treasury solves the AD problem simply by financing ALL government spending through the issuance of Treasuries to the Fed and simultaneously eliminating all taxes.

  8. Gravatar of libertaer libertaer
    15. June 2013 at 02:08

    Scott,

    I would go even further than Beckworth. We need permanent helicopter drops!

    I agree with you that chances are near zero that we need them if if we got NGDPLT. But we don’t have NGDPLT and to get us there (especially in Europe, where we have a single mandate), we need to change the image of monetary policy.

    Here in Germany people hate monetary policy. They think that it’s crony capitalism, that either banks or states get financed by the central bank! That’s false, for sure, monetary policy has nothing to do with banking or government. But can we blame people for thinking this way if we call our monetary institution a “central bank”? Can we blame them if let them buy government bonds? Why do we mix monetary policy together with banking and state debt? Do we want to confuse people?

    Here in Europe, we need a monetary policy where every child (German) can see that neither spanish bankers nor greek politicians get any newly printed money. That it’s not about bailing out governments or banks, but only about demand!

    Do to this, we need assetless open market operations! The monetary monopolist shouldn’t buy anything, which always looks fishy. They should just push money in by printing and giving it to each and every citizen. And they should suck money out by “taxing” and destroying the money, preferably through a VAT. Money in, money out, keep it simple!

    Then you could explain to the public: Listen, monetary policy has a goal, a target and an instrument.

    The goal is to steer aggregate demand so that we neither have output gaps nor overheating.

    The target is NGDPLT.

    The instruments are helicopter drops and VATs.

    No government bureaucrat, no banker ever gets between you and the money monopolist. It’s like the protestant revolution. Everybody gets a direct connection to God.
    :-)

  9. Gravatar of Benjamin Cole Benjamin Cole
    15. June 2013 at 02:57

    Libertaer:

    I agree with you, but the state printing money and handing it over directly to people won’t fly.

    I have proposed national lotteries, in which winners outnumber losers, and payoffs are in small amounts, as in less than $1000.

    There would be a limit to the number of tickets that could be sold to one person per location, and the biggest ticket would be $50 or so.

    In other words, you couldn’t go in and buy $1 million. You would have to provide your SS number to collect winnings, and there would be annual ceiling.

    The idea is to give cash to people who will spend it, and I suspect people who buy $50 tickets and win, will then spend the money.

    My other idea is to spike payouts at horse tracks.

    No one will listen to my ideas.

  10. Gravatar of W. Peden W. Peden
    15. June 2013 at 03:14

    libertaer,

    If you’re going to have symmetry between expansionary and contractionary monetary operations, given that you’re using helicopter drops to every citizens for expansionary monetary operations, then what you want as a contractionary operation isn’t a VAT, but a poll-tax. Otherwise, you’re hitting consumption when you contract the money supply, but not boosting consumption when you expand the money supply.

    The great thing about standard OMP procedure is that the way that base money is contracted works in exactly the same way that base money is expanded. That’s much better than sending taxmen to the houses of the poor to take whatever it is they have.

    That aside, if there’s a major financial innovation that reduces the demand for base money, is the VAT going to go up to 25%? 30%? From an unelected central bank?

    And since VAT is more progressive than a flat helicopter drop, one effectively has the central bank conducting redistributive policy. So people on the left are going to be upset every time the money supply expands (“regressive handouts to the rich!”) and people on the right are going to be upset every time the money supply contracts (“socialism!”).

  11. Gravatar of W. Peden W. Peden
    15. June 2013 at 03:16

    Benjamin Cole,

    If there was a problem with OMPs, your solutions would be interesting.

    Similarly, changing RRs would be a perfectly legitimate way to control the economy, if it wasn’t for the fact that OMPs can do the same thing but better.

  12. Gravatar of W. Peden W. Peden
    15. June 2013 at 03:16

    * That should be OMOs in the first paragraph.

  13. Gravatar of libertaer libertaer
    15. June 2013 at 04:51

    W.Peden,

    in Europe it would be easy to be symmetrical, because we already have a VAT. So you could pump money in by lowering the VAT, pump money out by raising it again.

    “That aside, if there’s a major financial innovation that reduces the demand for base money, is the VAT going to go up to 25%?”
    We are targeting NGDP. A drop in the demand for base money is no problem, as long as NGDP is on target. But if NGDP is rising too fast, yes, then you should raise the VAT. Remember it’s not a real tax, because the money gets pumped out and destroyed.

    And one should keep in mind that monetary policy is always metaphysics, not mechanics. It’s all about expectations. I remember Scott saying that in the case of NGDP targeting with helicopter drops as an instrument, chances are that you could immediately contract. The helicopters never have to fly.

  14. Gravatar of W. Peden W. Peden
    15. June 2013 at 05:04

    Libertaer,

    I’m glad that we at least agree that helicopter money is unnecessary.

    (1) That would require very frequent and costly changes in VAT.

    (2) It would separate VAT from its existing function, which is to raise revenue.

    (3) It’s still a tax as far as the people who pay it are concerned.

    (4) If you want the monetary creation process to be open to all (your selling point for this policy) just allow anyone to sell or buy from the central bank. While doing that, it would also be a good move to have OMOs based on the ratings of securities, i.e. whatever is rated as the safest asset (not necessarily domestic sovereign debt) is what the central bank buys.

  15. Gravatar of libertaer libertaer
    15. June 2013 at 05:21

    Benjamin Cole,

    lotteries are very American, I doubt that many Germans would like this idea. But I’m fine with it.

    In Europe we could do a helicopter drop through lowering the VAT, we already have VATs from 20-25% in most countries.

    But it’s important to remember that monetary policy is about expectations, that’s why the first goal is to get NGDPLT. Without it, nothing works. Even a helicopter drop won’t work, if people don’t think it’s permanent.

    The point of my post isn’t the credibility or commitment problem, but to get away from buying assets. Monetary policy has nothing to do with buying assets. Just take the whole superfluous discussion about the danger of having to recapitalize the central bank. As if a monetary monopolist needs capital!

    What you need is a vacuum cleaner, an instrument to suck money out of circulation. That’s the only reason why the central bank needs assets on it’s balance sheet. If it could use a VAT instead, the whole balance sheet can go. Monetary policy is not a business!

  16. Gravatar of libertaer libertaer
    15. June 2013 at 05:49

    W. Peden

    “I’m glad that we at least agree that helicopter money is unnecessary.”

    I don’t agree. I said you could make it symmetrical by raising and lowering VATs. But lowering VATs is still a helicopter drop. Since everybody consumes, everybody would have more money in his pocket.

    “1) That would require very frequent and costly changes in VAT.”

    No, monetary policy is primarily about expectations. If your NGDP target is high enough, you won’t have to push a lot of money around.

    “(2) It would separate VAT from its existing function, which is to raise revenue.”

    It would raise and lower the VAT. But it won’t be a VAT. You could call it an inflation charge/deflation charge cut. Nominally the VAT would stay the same.

    “(3) It’s still a tax as far as the people who pay it are concerned.”

    Sure, but that’s the point.

    “(4) If you want the monetary creation process to be open to all (your selling point for this policy) just allow anyone to sell or buy from the central bank. While doing that, it would also be a good move to have OMOs based on the ratings of securities, i.e. whatever is rated as the safest asset (not necessarily domestic sovereign debt) is what the central bank buys.”

    This would be even worse than what we have today. Who should rate which asset is safe? In Europe even government bonds are criticized as bailouts. Forget it.

    The whole point of my post is that monetary policy is not in need of assets. Keep it simple.

  17. Gravatar of Morgan Warstler Morgan Warstler
    15. June 2013 at 05:52

    I think at this time, its best to stroll back thru the garden of Who Gets the New Money:

    http://www.morganwarstler.com/post/37140255525/who-gets-the-new-money

    There is a real reason to run NGDP futures as a better than 50% odds hedge for the top 5% SMB owners.

    Big Government is a negative externality to Big Biz.

    The Internet is delivering many productivity gains to the successful SMBs.

    If 66% of our economy is private an it gets 3% productivity gains.

    And 33% is government and it gets .5%.

    Shrinking the size of the state is GROWTH by definition.

    ——

    What matters most to economic inequality is the spread of wealth amongst the top 20%.

    We want the bottom 80% which provides support services to the 20% to have as many yoga pupils, and nanny needers as possible.

    This is the economy of the 21st century.

    ACCEPT IT. LIVE IT. DON’T FIGHT IT.

  18. Gravatar of Geoff Geoff
    15. June 2013 at 06:27

    “It is important to remember the sequence of these events. It is easy to think that the downward pressure on interest rates was the inevitable consequence of financial troubles. Yet the top graphic clearly contradicts this. Each of the dotted lines represents a FOMC meeting, and each of these meetings was an opportunity for monetary policy to fight back against the collapsing economy. The Fed’s sluggishness to act is even more peculiar given that there were already serious concerns about economic distress in late 2007. As, the decision to wait three months to lower interest rates to zero was a conscious one, and one that helped to precipitate the single largest quarterly drop in nominal GDP in postwar history. The chaos in the markets did not cause monetary policy to lose control. Rather, the Fed’s own monetary policy errors forced it up against the zero lower bound.”

    No mention of distortions to economic calculation due to prior inflation, no mention of why a lack of accelerated Fed activity in 2007-2008 was necessary to prevent “chaos” in the markets. We’re just supposed to believe that the market was inherently problematic, and the Fed failed to save it.

    Pie in the sky, Godhead irrationality.

  19. Gravatar of Bill Woolsey Bill Woolsey
    15. June 2013 at 06:40

    Peden:

    There is no need to contract the quantity of money by a tax increases. The Treasury just sells interest bearing bonds on the open market. Those buying the bonds pay for them. Their banks cover the payments out of their reserve balances. The Treasury extinguishes it’s added balance at the Fed.

    What this means is that the base money created by the helicopter drops is effectively an increase in the national debt. As long as the demand for base money remains high, that increase in the national debt can be funded at zero interest. If the demand for base money falls, that addition to the national debt must be funded at the market interest rate.

    That the Fed pays interest on reserve balances adds other layer of complexity. In effect, however, it means that the added national debt would be funded at the interest rate the Fed pays on reserve balances rather than zero. It is an insane policy, but one that has been justified by the need to allow Wall Street traders to make enough money to stay in business.

    I think that is insane (though I don’t have to worry about the political pressure that can be generated by special interests.)

    The exact same result occurs if Congress provides transfer payments or tax cuts funded by issueing government debt, and the Fed buys all the added debt with newly created base money.

    When the Fed decides that the demand for base money has fallen, the Fed sells the government debt it had purchased.

    If the Fed were abolished and the Treasury operated monetary policy, then it would do the same thing. Congress passes the tax cut or transfer program, and the Treasury pays by issuing Treasury currency. If at some future time, there is too much Treasury currency outstanding, causing excessive inflation, then the Treasury would issue interest bearing debt, sell it, and retire the Treasury currency used to make payment.

    From a monetarist perspective this is all pretty clear. I suppose people who think that central banks set interest rates might find it strange that it is all equivalent. But surely it is obvious that if the Treasury were to retire currency by selling Treasury debt that would have a direct effect of raising the interest rates on that Treasury debt. (Of course, as we Market Monetarists always insist, paradoxically have the effect of lowering interest rates on that Treasury debt by alleviating inflationary pressure.)

  20. Gravatar of W. Peden W. Peden
    15. June 2013 at 07:34

    libertaer,

    “Since everybody consumes, everybody would have more money in his pocket.”

    Everybody consumes, but not in the same proportions or in the same time period.

    “No, monetary policy is primarily about expectations. If your NGDP target is high enough, you won’t have to push a lot of money around.”

    Expectations management involves relatively frequent (i.e. multiple times per year) changes in base rates. Why wouldn’t the same apply to a VAT?

    “It would raise and lower the VAT. But it won’t be a VAT. You could call it an inflation charge/deflation charge cut. Nominally the VAT would stay the same.”

    It’s not a question of what it’s called, but a question of whether the existing tax is used for revenue. We could have two VATs, one paid to the national government and one to the ECB, but why not just use OMOs?

    “This would be even worse than what we have today. Who should rate which asset is safe? In Europe even government bonds are criticized as bailouts. Forget it.”

    Base it on market evaluations of the asset.

    Bill Woosley,

    “There is no need to contract the quantity of money by a tax increases.”

    My point exactly. If a country is going to have to have a central bank, then there is no need for that central bank to do anything more complex than buying and selling assets. RRs, IOR, the discount window, and any fiscal policy aimed at demand management, are just so much superflous bureaucracy and rent-seeking.

  21. Gravatar of W. Peden W. Peden
    15. June 2013 at 07:36

    The least-bad central bank would be very like a currency board, except with the goal of stabilising NGDP (or NGDI or nominal wages or something along those lines) rather than the modern pseudo-bank model.

  22. Gravatar of Once more on the ‘austerity debate’ from a Market Monetarist perspective | Historinhas Once more on the ‘austerity debate’ from a Market Monetarist perspective | Historinhas
    15. June 2013 at 07:47

    [...] a string of posts: David Beckworth, Scott Sumner, Paul Krugman and Simon Wren-Lewis, to mention a [...]

  23. Gravatar of jknarr jknarr
    15. June 2013 at 08:15

    The two sides of the Fed balance sheet is an atavistic holdover from the gold standard when assets meant something.

    Now, each dollar of base money has a future tax/debt burden attached. This appears inferior and less effective than a pure fiat regime:

    Why can’t the fed create money like any other bank? Create base money liabilities on demand, and just call it a “special zero-interest loan” on the asset side of the balance sheet? Real question.

  24. Gravatar of Negation of Ideology Negation of Ideology
    15. June 2013 at 08:32

    libertaer -

    “What you need is a vacuum cleaner, an instrument to suck money out of circulation. That’s the only reason why the central bank needs assets on it’s balance sheet. If it could use a VAT instead, the whole balance sheet can go.”

    I don’t disagree, but it’s really the same thing. It’s an asset whether you call it an asset or not. Imagine three scenarios:

    1. A central bank issues $3 Trillion in base money and hold $3 Trillion in Treasuries.

    2. A central bank issues $3 Trillion in base money, holds no assets, but the Treasury promises to tax up to $3 Trillion out and give it to the bank if it needs to reduce the base.

    3. No central bank. The Treasury issues $3 Trillion in base money(like the old US Notes) and promises to tax up to $3 Trillion out of the economy if it needs to reduce the base.

    All three are the same. The base is backed by the same asset, which is the taxing authority of the Treasury. The only difference is how we count the debt on paper. It might appear that the national debt is $3 Trillion less in case 3, but it’s really the same.

    I prefer keeping it at choice 1, and if we ever decide to pay off the national debt (I hope we do), then we can invest that $3 Trillion in Treasury backed debt – making the Federal government a net interest receiver rather than a payer.

  25. Gravatar of James James
    15. June 2013 at 09:10

    Scott,

    do the policies you advocate depend upon the ‘wealth effect’ to work?

    i.e. is the aim basically to inflate asset prices, in the hope that asset owners will feel wealthier and spend more, thus increasing aggregate demand?

    Isn’t that just a form of ‘trickle-down’ economics?

    Thanks.

  26. Gravatar of ssumner ssumner
    15. June 2013 at 13:46

    I read all the comments, but not much time for response today.

    Rob, David’s plan doesn’t boost AS.

    Brenb, 1. It’ll be in my new book.

    2. I’ve discusse dit, bad move.

    3. Yes, it was monetary policy–printing too much money, not a tight labor market.

    Max, I mentioned level targeting in the post.

    James. No, the hot potato effect, not the wealth effect. Plus the effects dtoh discusses above.

    Libetaer, But why would German’s like helicopter drops more than the much less radical policy?

  27. Gravatar of dtoh dtoh
    15. June 2013 at 18:34

    James, Scott,
    The HPE model is predicatively accurate but not what actually happens. It’s the real price of financial assets which together with expectations is the mechanism. Continued insistence on the HPE is the main reason why people dispute the effect of monetary policy at the so called ZLB. Read my earlier comment.

  28. Gravatar of interfluidity » A quick note on “helicopter drops” interfluidity » A quick note on “helicopter drops”
    15. June 2013 at 19:20

    [...] Sumner quibbles, noting [...]

  29. Gravatar of libertaer libertaer
    16. June 2013 at 01:08

    W. Peden,

    I got your point, but don’t agree. I want to make monetary policy looking more neutral, you want Bernanke to buy private assets. Good luck with that.

    Negation of Ideology

    No disagreement. But here in Europe it would be great to have a monetary policy which don’t involves buying government debt. We don’t have one government.

    Scott,
    the Germans would hate it anyway. It’s a racial thing, they are Germans, what can they do? :-)

    Serious, like in most countries the majority doesn’t get monetary policy. What Germans have, is a gut feeling. And it’s against us. So if you put two economist on TV, one arguing it’s all structural, the others it’s mostly demand, then most Germans would like the structural guy.

    But nevertheless, if we would have an easy money in, money out-monetary policy as described above, the discussion here in Europe (remember, we don’t have one government) would be a lot easier. All the useless, time-killing talk about too much debt, bailing out banks, bailing out governments, picking winner and losers, who will recapitalize the ECB yada yada… would be gone. The discussion here in Europe would reduce to: is it all structural or is a big part of the crisis due to low aggregate demand? And that would be good.

  30. Gravatar of libertaer libertaer
    16. June 2013 at 02:08

    Scott,
    just another point. I don’ think that helicopter drops are radical. I think I read it “chez” Nick Rowe first, but you could say that OMOs are always heli drops. You drop money on certain people, then tax them immediately, but let them pay in government bonds.

    It’s especially important to conceptualize it like that if you talk to MMT guys who think there is a big difference between OMOs and heli drops. But it’s not. In both cases you raise the money supply.

  31. Gravatar of jknarr jknarr
    16. June 2013 at 08:18

    Negation, aren’t expectations different under the three scenarios – 1 is an obligation now, and default on clawing back funds is not really an option, whereas “default” is possible under 2 – the future has some uncertainty.

    Inflationary incentives may also be different, with deflationary pressures highest in 1, inflationary incentives greatest in 3?

  32. Gravatar of Joe Eagar Joe Eagar
    17. June 2013 at 02:03

    Seriously? People are still talking about fiscally-distributed helicopter drops? Remember those 2009 and 2010 tax cuts, that were financed by QE? That was supposed to be a helicopter drop, no? It didn’t work.

  33. Gravatar of A Truce Between Monetarists and Fiscalists? | Matthew C. Klein A Truce Between Monetarists and Fiscalists? | Matthew C. Klein
    17. June 2013 at 11:54

    [...] some people objected to Beckworth’s proposal because they believe that an activist central bank can literally [...]

  34. Gravatar of Negation of Ideology Negation of Ideology
    17. June 2013 at 20:12

    libertaer – I assumed that your proposed VAT vacuum cleaner would be a pan-Eurozone tax, so there would need to be one government implementing and collecting it.

    jknarr – I guess it depends on how binding the promise to pay it back is, or perhaps how binding it is perceived to be by the public. If the VAT used for the “vacuum cleaner” goes up and down automtically then it may be just as binding as using bonds. If not, then I agree with your analysis. But if it’s not binding, then is it really fulfilling its purpose?

  35. Gravatar of libertaer libertaer
    18. June 2013 at 01:28

    negation of ideology
    “I assumed that your proposed VAT vacuum cleaner would be a pan-Eurozone tax, so there would need to be one government implementing and collecting it.”

    The VAT would be collected for the whole eurozone, but it’s not a real tax (the money gets destroyed), which is the whole point. You would need pan-eurozone coordination managed by the ECB, but you don’t need a common fiscal policy, which we don’t have, and you wouldn’t have to buy government debt by southeuropean states which the Germans ressent. You would stabilize NGDP, but only indirectly helping states or banks, which is very important, because it looks different. The “look” matters.

  36. Gravatar of ssumner ssumner
    22. June 2013 at 06:38

    dtoh, Expectations of the HPE.

    Libertaer, I still don’t see why it matters what the Germans think.

    The Fed is not inhibited by what Californians think. Or midwesterners.

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