I’m actually surprised (but pleasantly surprised) that there is agreement on this point among diverse ideologies. When I did this post I thought I was just about the only one who didn’t see helicopter drops as foolproof way to boost AD. I had thought economists of both the Keynesian and monetarist stripe would say “one thing both Keynesians and monetarists agree on is that a ‘helicopter drop’ would work.” Indeed if you read the post you’ll see me mildly criticizing David Beckworth for what I thought was endorsement of that view. Rereading it I may have missed his point, as he was combining a “helicopter drop” with NGDP targeting. In any case I’m glad to see the helicopter drop myth has been put to rest.
PS. Of course although a “helicopter drop” does not solve the problem, a helicopter drop (no quotes) would work. Shoveling cash out of an actual helicopter would be a very credible “promise to be irresponsible.” And it would be irresponsible, as it’s not needed. NGDP level targeting is enough.
PPS. SG sent me to a Brad DeLong post criticizing Beckworth:
What David Beckworth misses is that if quantitative easing is used to fund expansionary fiscal policy-if the government buys not long-term Treasury bonds but, rather, bridges and NIH research and the human capital of twelve-year olds-then those asset purchases are going to be permanent: you cannot unwind those transactions. Hence, by Beckworth’s logic, that policy will be effective.
Yes those specific real output transactions are not reversible, but the money used to finance them can be later withdrawn via open market sales, and expected future fiscal policy can tighten creating somewhat of a Ricardian equivalence problem. Now in fairness Ricardian equivalence only applies 100% to taxes and transfers, not real expenditures. So I agree with DeLong that as a practical matter his plan is likely to be effective.
But not necessarily. If the government announced a 3% of GDP money financed fiscal stimulus for 2014, and also announced that beginning in 2015 they would reduce M2 at 20% per year for 4 years, you’d have a Great Depression expected in 2015, and that expectation would cause a Great Depression to begin in 2014, as the crash in business investment in 2014 overwhelmed the puny fiscal stimulus. As a theoretical matter it’s still all about the future path of policy; current actions are relatively unimportant.
PPPS. If Congress doesn’t renew extended UI benefits, as now seems likely, we’ll have an interesting experiment in 2014. I’m on record as believing extended UI raised the unemployment rate by around 0.5% (DeLong seems to agree with me on this point), but have an open mind on the issue.
There’s also the issue of whether monetary offset applies to this sort of policy change–I say partly but not completely as these are lower skilled workers (on average) and hence RGDP changes less than employment when they find jobs. Also it’s a positive supply shock that does not raise inflation. Of course monetary offset does apply to the demand-side effects of lower UI payments, and with Yellen coming in I think monetary policy will be as aggressive in doing offset, if not more so, than under Bernanke. My hunch is RGDP growth might pick up slightly in 2014 because of:
2. Less UI supply-side effects.
3. Possible European recovery boosting US manufacturing.
4. Stock market seems optimistic. Rising long term rates.
I emphasize slightly faster–I’m not expecting a boom. We are also getting a slight reduction in austerity, but probably not a big enough policy swing there to have another offset test. Most forecasters expect a slight pickup in growth, so I’m not exactly going out on a limb here.
PPPPS. Alan Blinder says he was the first to recommend negative IOR. I don’t think so. I had two papers in The Economists’ Voice in early 2009 (especially the second), the earliest I could google Blinder promoting the idea was 2010.
HT: Frank McCormick