Helicopter drops would work, but “helicopter drops” might well fail

Steve Waldman has a post discussing the problems involved in making monetary stimulus effective.  He ends up by claiming that “helicopter drops” would certainly work, but the Fed isn’t authorized to do them:

To the degree that our problem is on the demand-side and stems from private-debt-overhang-induced risk aversion or a desire to hoard money, we know the solution. That problem, if it exists, will go away if we give everyone money. But giving everyone money is not conventional, authorized, monetary policy. It requires new law.

In macroeconomics the term “helicopter drop” refers to combined fiscal and monetary stimulus, essentially have the Fed print money to finance a budget deficit.  In recent years the phrase “print money” has become slightly misleading, as the Fed has turned bank reserves into interest-bearing debt.  But with or without interest on reserves, a “helicopter drop” is not a foolproof escape from a liquidity trap.  To see why, consider why conventional monetary policy is often ineffective.

In the early 2000s the BOJ printed lots of money, and the Japanese government issued lots of debt.  That should have been inflationary, if helicopter drops really worked.  But it wasn’t, because the BOJ also hinted that they’d eventually pull the money back out of circulation, to prevent prices from rising.  And in 2006 they did just that, and prices didn’t rise.

Many people assume this “expectations trap” (popularized by Krugman) applies only to conventional monetary stimulus.  Actually, it also applies to a combined fiscal and monetary stimulus, as we saw in Japan.  Temporary monetary stimulus won’t be effective.  It won’t work if rates are zero.  It won’t work if rates are positive.  It won’t work if combined with fiscal stimulus.  It simply won’t work, if temporary.

The Fed has also promised their monetary injections will be temporary, and hence they haven’t worked, just as in Japan.  You might argue “what else could they do, if they promised the tripling of the base was permanent, we could end up with hyperinflation.”  Yes, they can’t say it’s all permanent, but they could tell us how much.  But Steve Waldman says they won’t do that.  In that case there is no reason to expect any stimulus from more money, helicopter drop or not.

And yet, the market reaction to hints of QE2 suggests that open market purchases can be successful, even at the zero bound.  The most likely explanation is that the markets weren’t reacting so much to the action itself, but rather to the implied signal it sent about Fed determination to prevent deflation.  And the Fed action succeeded (so far) in preventing Japanese-style deflation.

And now for the perplexing title of this post.  When I put “helicopter drop” in quotation marks, I mean money financed deficits.  When I don’t use quotation marks, I mean real cash and real helicopters.  An elite macroeconomist would tell you it makes no difference, and in a purely technical sense that’s true.  But in terms of expectations it makes all the difference in the world.  An actual helicopter drop, Ben flying across America dumping hundred dollar bills out of a helicopter, would almost certainly raise inflation expectations sharply.  Especially if he dressed up like Peter Pan and kept announcing through a megaphone “if you believe you can inflate.”  The imagery would be powerful and evocative.  Indeed so much so that it would probably require only a tiny amount of actual $100 bills–just make sure the news cameras were there.  Better yet, do it over minority neighborhoods, to triggers subliminal concerns among Fox News viewers.

Of course all this would be crazy, and I am not advocating it.  But these thought experiments illustrate that we’d be much better off if the Fed simply told us where it wanted to go, and how it was going to get us there.  I get frustrated when Waldman says the only reasonable policy is a non-starter, because it’s not what the Fed wants to do:

The Fed is not going to target NGDP or a price level path over any relevant time frame without a change in governance structure or mandate. People on the left and right and especially the technocratic center who like to see the Fed as a loophole through a dysfunctional Congress are kidding themselves. The Fed is a political creature, not some haven for philosopher-economists in togas who will openly consider your ideas. Get over it and get your hands dirty.

Look, we’ve already established that what the Fed “wants to do” won’t work, it will fail.  It’s our job as pundits to suggest policies that actually will work.  If our society is suicidal then there’s nothing we pundits can do about it.  If we are told that every single suggestion that will work is politically unacceptable, there is nothing we can do about it.  Except keep trying to educate people.

Now I have to go iron my toga for a party tomorrow night.



37 Responses to “Helicopter drops would work, but “helicopter drops” might well fail”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. September 2011 at 18:26

    Scott wrote:
    “Now I have to go iron my toga for a party tomorrow night.”

    Did you say toga party?


    As I’ve always said, nothing, absolutely nothing, compares with the dignified rarity of the academic lifestyle.

  2. Gravatar of Cliff Cliff
    19. September 2011 at 18:37

    “An elite macroeconomist would tell you it makes no difference, and in a purely technical sense that’s true.”

    Scott, perhaps but don’t you agree that spending can have different utility? And that the return on a dollar spent and/or dropped is not a given? For example, (and as an exaggeration) compare using the money to prevent a bridge from falling and causing injury and delivery delays to dropping the money from a helicopter and watching it used to buy drugs?

    Also, do you agree that humans can be very production and very destructive and that their environment plays significantly into this?

  3. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 19:03

    Mark, That video clip brings back memories.

    Cliff, You said;

    “For example, (and as an exaggeration) compare using the money to prevent a bridge from falling and causing injury and delivery delays to dropping the money from a helicopter and watching it used to buy drugs?”

    So when you think of government spending you visualize productive bridge repair, and for private spending you visualize illegal drugs. Would it be fair to assume you are not a libertarian? More seriously, I agree it makes a difference–that was my point.

  4. Gravatar of Dan Kervick Dan Kervick
    19. September 2011 at 19:17

    Wasn’t Waldman’s point more about what the Fed is legally permitted to do than it was about what it wants to do? It’s one thing for monetarists to strenuously advocate policies that simply represent a deviation from past precedent, and might be considered politically unacceptable. It’s another to advocate policies that are outside the institutional powers of the policy-making body in question.

    My question is why, after all the manifest failures and dashed hopes of central bank operations, both here and in Japan, we should expect people to adjust their behavior and expectations in any significant way to yet more Fed pronouncements – no matter much conviction or zeal is behind the pronouncements. These spectacular pronouncements only work their psychological effect if people somehow believe in the vast powers of the Fed and its “targets”. But people don’t believe it any more. A lot of the old myths about colossal powers of central banks have been dispelled. Part of that is due to a series of legal and institutional changes in the financial system that have diminished the hard causal foundation of those powers, even if the residual psychological powers attending he Fed’s mystique lagged behind for a few years.

    Maybe if we reimposed the old, much stricter reserve requirements which gave the Fed more direct control over bank lending; or maybe if we blow up the shadow banking system so that the Fed is once again at the apex of our entire financial system; or maybe if we rewrite the monetary control act so that the Fed can literally just print up money and drop it into a government accounts, or household accounts, without purchasing an asset – maybe those things would give the Fed the kinds of powers you would like it to have. I’m not sure at all that it would be a great idea for it to have those powers. But at least promoting those changes would provide a more realistic foundation for monetarist prescriptions for Fed policy.

    The imaginary scenario of Ben Bernanke having a big impact by dropping a few hundred dollar bills out helicopters, and shouting with great gusto and conviction, “Inflation will happen now!” seems about as realistic as imagining that Bernanke could have a big impact on the national fear level by running with scissors and yelling, “Danger will befall you now!” People would just laugh.

    Now yes, Bernanke could cause inflation if he actually dropped many, many $100 bills from helicopters. But as Waldman pointed out, Ben Bernanke would be arrested if he did that, or something equivalent to it.

    On the BOJ thing, isn’t the problem that it is not enough to print money and “issue” it in some way. Central banks are limited in the mechanisms open to them for getting money into circulation. Dropping it into a reserve account is only the first step.

  5. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2011 at 20:59

    “In macroeconomics the term “helicopter drop” refers to combined fiscal and monetary stimulus, essentially have the Fed print money to finance a budget deficit.”

    No. Helicopter drop means Monetary Authority directly hands money to citizens.

    “It’s our job as pundits to suggest policies that actually will work. If our society is suicidal then there’s nothing we pundits can do about it.”

    Sumner, you are a 90 lb. weakling.

    I TELL YOU how it is… you don’t like sand in your face.

    But, none the less, I tell you how it is.

    You are a egghead. You have NO CLUE what works, you couldn’t figure out normal America after watching 1 year of QVC with a QVC credit card you didn’t have to pay for.

    You are not NORMAL.

    You don’t have any clue what normal looks like.

    You don’t own a god damn cell phone.

    So PLEASE STFU, you are not a pundit.

    NO ONE will hear anything you say and march because you moved them. You don’t know the polling data on words and phrases. You don’t know what zip codes test within the small sliver of the American likely voter independent middle.

    You don’t know which zip codes have high densities of influences.

    So, let me clear this up for you Dr. Egghead…

    Our society doesn’t need to worry about the unemployed right now.

    Our society need to focus on why liberalism is evil, and Obama is proof that after 30 years of not listening to them, we should forget they exist for at least 50 years next time.

    if we do this right, the next time there is a “progressive” he’ll be more conservative than Bill Clinton.

    This is the PLAN.

    You are a monkey…. dance monkey dance!

    Ok, now that we have it all straightened out – you STILL want to be a pundit? You STILL want to call yourself a pundit?

    A PUNDIT speaks in poll tested phrases. He does what guys like I say.

    There are no shoot from the hip pundits, Sumner.

    Dummy up.

  6. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2011 at 21:25

    And I think David Brooks is a pansy…

    “In reality, the top 10 percent of earners pay nearly 70 percent of all income taxes, according to the I.R.S. People in the richest 1 percent pay 31 percent of their income to the federal government while the average worker pays less than 14 percent, according to the Congressional Budget Office.”

    Think of it this way, the new dynamic is Obama does what David Brooks says 110% and we call that being a Democrat.

    Hippies are dumb, they will poke smot and believe anything.

    The other side, not so dumb. The other side owns all the stuff, votes all the time, and is determined to give less, and keep more… and since they are 40%+ of the likely voter population…

    They rule with an Iron fist. YOUR JOB is to beg them to wear a silk glove.

  7. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2011 at 21:25


  8. Gravatar of jj jj
    19. September 2011 at 21:33

    Expectations trap… or, in other words, Ricardian equivalence.
    Interesting this is coming from Paul Krugman.

  9. Gravatar of David Pearson David Pearson
    19. September 2011 at 21:49


    Steve Waldman writes about what the Fed’s practical, legal constraints in a democratic system. You have suggested that the Fed reduce the IOR below zero. There seems to be some confusion, or at least disagreement, on this score: some argue the Fed can’t legally do this.

    The IOR enabling legislation is the 2006 Financial Services Regulatory Relief Act (there’s an irony!). Does it allow the Fed to also charge interest on reserves? Or would this require further enabling legislation? What are the chances Congress would pass that law?

  10. Gravatar of Edwin A. Edwin A.
    19. September 2011 at 22:24

    What would happen if Bernanke hired ninjas to stealthily put freshly printed 20 dollars bills randomly in the pockets of one fifth of the population without telling anyone and without making some new fed announcement other than what we already know about keeping interest rates at 0 until 2013? Will this type of “helicopter drop” work without the fed actively communicating that it wants higher inflation?

  11. Gravatar of Cameron Cameron
    20. September 2011 at 01:06

    I would still guess that a change to the Fed’s mandate explicitly allowing/requiring them to level target CPI/NGDP is much more likely than passing adequately sized fiscal stimulus. You could potentially get republicans on board by pointing out it would be a good guard against inflation.

  12. Gravatar of dwb dwb
    20. September 2011 at 03:54

    even if the fed told us where it wanted to go, i am not sure the fed’s promise is credible. Given the dissention at the fed and the huge pile of reserves, the market may merely think it will change its mind or that the Fed is pushing on a string (yes, low interest rates, thats the problem!) For a higher inflation target to be credible, the Fed will also have to establish an UE or GDP target as well. Here comes operation twist. *sigh* times will be japan style tough for the next 20 years or more.

  13. Gravatar of bill woolsey bill woolsey
    20. September 2011 at 04:03

    If people believe that the central bank is targeting nominal GDP and that it can do so, this will be expansionary.

    But suppose people don’t believe this. If Helicopter drops, or heroic open market purchases, or negative interest rates on reserves (and deposits) won’t work, what will?

    Assuming that monetary policy must work as if people are blind is a mistake. But if monetary policy cannot work for the blind, it is more than a bit worrisome.

  14. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 04:33

    bill woolsey / cameron,

    Your points are actually the same thing, they are variation of what I have been saying.

    But you are both pointed in the right direction. So here goes again….

    HEGEMONY matters.

    The reason this shit right now is not credible is that is OBVIOUSLY not what the hegemony wants.

    I will restate why the Tea Party is the hegemony, but start here as George Will said on Sunday, the Tea Party IS the Republican establishment. The Rockefeller country club crowd are weak outsiders.

    Look, there was a time in American history when the rabble was roused to UNITE and topple the haves.

    FDR did happen. But….

    The resulting system has 40% of the likely voters owning all the hard assets, all the guns (guns change attitudes, see the UK), spending part of their earning lives in the top 10%, maybe just the top 20%.

    They RUN things.

    The oligarchs have $, but not enough to topple the Tea Party. And they have no votes.

    The Dems have votes, but the bulk of those votes have no money, and they don’t own stuff. During the aughts, we saw the oligarchs make gains, but ONLY from the Dems (the vanishing middle class).

    The Tea Party lost nothing.


    OK, so can make the Fed credible when it say it is going to go the full Sumner?

    When Rick Perry says it.

    When Rick Perry says we’re going to hog-tie the Fed, so that they have to institutionalize King Dollar with 3% (maybe 3.5%) NGDP level targeted, the WHOLE WORLD will believe it.

    Because that is what the hegemony wants.

    Look, most people here don’t want to accept the lay of the political land in the US… this is a center-right nation.

    And most people here are WILLFUL in their efforts to pretend politics don’t matter.

    But the odds are far greater that certain interests in America will be served than other interests.

    And we know it. The polling data shows that there is no clear united left, and there is a clear united right.

    Observation of the media shows institutionalized hegemony. It is a joke on Jon Stewart EVERY NIGHT.

    Start with:

    Jon Stewart is correct.
    The Fox News audience runs this country.
    The Fed will be credible when the Fox News audience gives its consent.

    Ask yourself WHAT will make Fox News (think GOLDLINE!) adopt Sumner’s thinking?

    When the NGDP target is 3% and Rick Perry is President.

    woolsey, you ASKED what can make the Fed credible, and I just gave you the winning answer.

    Adopt it.

  15. Gravatar of Jason Odegaard Jason Odegaard
    20. September 2011 at 04:35

    Morgan, shouldn’t economic policymakers worry about the unemployed? It’s a huge loss of potential economic output when the ~5% of Americans who were working, are no longer working.

    Also, just thought I would drop a link here about towns in Brazil issuing local currency (with somewhat of a backing to the national currency):


    Is this interesting from a monetary aspect at all? Or is all the benefit just in promoting local economic activity?

  16. Gravatar of dwb dwb
    20. September 2011 at 06:24

    and for those who missed it: Milton friedman is a traitor.


    p 30:
    “Because the essence of quantitative easing is for the Federal Reserve to create
    the credit that depository institutions would otherwise be creating under normal
    circumstances, rather than specifying ahead of time the amount of securities it
    would purchase, the Federal Reserve should purchase an amount of securities
    such that combined Federal Reserve and depository institution credit grow at
    some specified target rate, perhaps consistent with some desired rate of growth
    in nominal domestic demand.”

    I hear a growing chant of nominal gdp targets, in some form. maybe someday, if central bankers stop trying to put out a grease fire with water.

  17. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 06:41

    Jason Odegaard,

    Jason, logic says the new 5% unemployed (we’ll say 10%, up from 5%), are the marginally least productive workers, so PLEASE stop with the “potential economic” blah blahs.

    The top 1% DWARF the loss output of your 5%.

    Look, I don’t see excess capacity, I’m UNABLE TO SEE IT, I can see potential ROI.

    And in order for me to see potential ROI in the unemployed, they have to get paid less money than the current situation allows / promotes.

    NO ONE is FORCING them to work to live.

    We should for FORCING them to work.

    Here’s today’s Drudge:



    Now look, I understand the arguments for Food Stamps, just like I understand Energy Assistance, Section 8 Housing, School Lunches, UI, etc.

    But I live in a capitalist society.

    ALL those recipients ARE POTENTIAL ROI for capitalists!

    So, IF the lower class are gong to receive government benefits, the government is GOING TO SELL their labor on the private market – in an auction starting at $40 per week.

    We can make ALL AID based on your labor being auction for whatever the market will bear.

    You don’t have to feed yourself, but you do have to have a boss – NO MATTER WHAT.

    You are disabled and can’t leave your house?

    No problem we’ll take care of you, BUT if ANYONE can think of a way of using your 40 hours a week in your house, and they BUY YOUR TIME, you WILL do what your boss says, you will direct your labor towards his / her agenda.

    I’m not saying everyone has to work, I’m saying EVERYONE who a capitalist wants to spend $40 per week, and put to work has to work.

    Then we are looking at human capital for what it is… a natural resource that should be directed by the invention and minds of entrepreneurs.

  18. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 06:45

    Question for Scott:

    A 3% level targeted NGDP and KING DOLLAR are basically the same thing – historically speaking.


  19. Gravatar of Scott Sumner Scott Sumner
    20. September 2011 at 07:45

    Dan, You said;

    “Wasn’t Waldman’s point more about what the Fed is legally permitted to do than it was about what it wants to do?”

    The Fed is legally allowed to do NGDP targeting–indeed you could argue that it’s the current inflation target that violates the law, that violates the dual mandate.

    And when laws get in the way, Congress changes them fast. In 2008 the Fed said it needed authority for IOR, and Congress gave it within days.

    You said:

    “My question is why, after all the manifest failures and dashed hopes of central bank operations, both here and in Japan”

    You’ll have to explain that one to me. The BOJ said they were opposed to inflation. They tightened policy in 2000 and 2006 to prevent inflation. They did prevent inflation. How did policy “fail.”

    You seem to think there are historical examples of central banks that tried to inflate and failed. But there aren’t, not one in all of human history. (Obviously I mean for fiat money central banks, the gold standard is different.)

    Brad DeLong asked Bernanke why he didn’t shoot for 3% inflation, and Bernanke said it would be a bad idea. Too high. Seems to me the central bank was believed, as inflation expectations are still around 1.7% for 5 years–so how can you say policy failed?

    You said;

    “Now yes, Bernanke could cause inflation if he actually dropped many, many $100 bills from helicopters. But as Waldman pointed out, Ben Bernanke would be arrested if he did that, or something equivalent to it.”

    And who advocated they do that?

    jj, Yes, I made the same observation earlier–it is ironic. And he fails to realize it also applies to fiscal stimulus.

    David, You said;

    “Steve Waldman writes about what the Fed’s practical, legal constraints in a democratic system. You have suggested that the Fed reduce the IOR below zero. There seems to be some confusion, or at least disagreement, on this score: some argue the Fed can’t legally do this.”

    Only by people who don’t understand the law. The FDIC fee on reserves is a negative IOR, and we have that right now. If the Fed cut IOR to 0%, it would be effectively negative.

    And of course when the Fed asked for IOR, Congress gave it within days with no questions asked. They’d do the same for negative IOR if a change in the law was needed, but it isn’t.

    BTW, I don’t think negative IOR is the best solution, I much prefer a higher NGDP or price level target.

    Edwin, It depends how many, but for reasonable amounts it wouldn’t have much effect.

    Cameron, Yes, and also see my answer to Dan.

    dwb, No fiat money central bank ever tried to inflate and failed. Never happened, never will. If you plan to do something it’s easy to convince the markets–because the markets are much smarter than the Fed. They know what the Fed will do before the Fed does. In late 2007 they knew the Fed would cut rates sharply before the Fed realized it.

    Bill, If that were true the Fed could make vast profits from speculators via inside trading. I don’t think speculators are that stupid. That’s the least of my concerns.

    Jason, You are talking to Morgan like he’s someone that cares about human suffering. Big mistake.

    dwb, Nice quotation.

    Morgan, I have no idea what “King Dollar” means, nor do I much care.

  20. Gravatar of Becky Hargrove Becky Hargrove
    20. September 2011 at 07:47

    After a little digging and thinking this morning I now have my “thin air” correlation, i.e. monetary wealth creation amounts to these two things: the accountant’s pen in the bank cubicle, and also the quantitative easing by the Federal Reserve which amounts to buying bonds from investors, by the Fed. Of course to buy bonds, printing money ensues.

    However, does the public really understand that the Fed cannot print money for any old thing it pleases? As to our laws, was it always true that our government could not print money for fiscal stimulus, or was this a reaction to something like the hyperinflation of Weimar Germany? I agree with you that inflation is not the overall problem it once was, perhaps the tight laws re: money creation are part of the reasonl

  21. Gravatar of Benjamin Cole Benjamin Cole
    20. September 2011 at 08:10

    Scott Sumner’s commentary is correct and that is why I favor a national lottery that pays out more than it takes in. Tickets are sold in $10 increments, and you can buy no more than $100 at a time at a location.

    Payouts are under $1000 per winning ticket–in other words, no one guy who makes a mint, but lots of moderate winners.

    Hopefully, such terms would mean lots of winners in lower- and middle-income neighborhoods. Moral hazard is eliminated as winners did risk capital.

    You get your real helicopter drops, or as close as you can get in this world.

  22. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 08:20

    Jesus Scott, it is hard talking to someone not steepd int he lexicon of economic discussion. 🙂

    KING DOLLAR is Larry Kudlow’s phrase it is the belief that the Fed should have only one task: keep inflation low and the dollar strong.

    I just want you to confirm that a 3% level target NGDP means far more conservative money supply than a 5% level target.

    I want you to use history as our guide.

    If the Fed had been running 3% level for the past say 40 years… we’d have spent lots more time with far higher interest rates, right?

    And at 5% level, we’d have had lower rates, right?

  23. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 08:23


    Moral hazard is only elimnated when the guys who win are the guys with hard assets.

    STOP trying to give free money to people with no money. Money is not a social good.

    Worry about the people with money having its value reduced, SOLVE FOR THAT while you do your easing and you will have the plan MOST LIKELY to be adopted.

    Pay off the deciders, dear boy.

  24. Gravatar of David Pearson David Pearson
    20. September 2011 at 08:35


    I’m still left wondering: does the 2006 Act authorize a tax on ERs? The FDIC is authorized to charge deposit premiums. This has nothing to do with legislation governing the fed.

    I highly doubt this congress would authorize it, 2008 was light years away in political terms. Do you really think the GOP would approve it?

  25. Gravatar of OhMy OhMy
    20. September 2011 at 08:44

    Maybe it doesn’t make sense to remind of this fact on this blog, but helicopter drops are fiscal operations.

    You can only make merry policy recomendations because you are unfettered by knowing where monetary policy ends and fiscal begins. Most of your prescriptions are fiscal policy (some of them contractionary, like charging interest on reserves).

  26. Gravatar of Benjamin Cole Benjamin Cole
    20. September 2011 at 09:01


    I am worried about people who have money–and own real estate, for example.

    The Japan example suggests that real estate owners should prepare for perpetual losses, unless we inflate. Some for equities owners.

    I would happily hand out Ben Franklins to rich people if they would promise to spend it, in addition to normal spending patterns. But likely they would save the money.

    We know lower-income people spend every penny that get.

    I don’t want to help poor people. I want to goose the economy.

  27. Gravatar of Bababooey Bababooey
    20. September 2011 at 09:39

    You can ignore the path Waldman stepped down, but don’t underrate its importance. The Fed cannot (or will not, no difference) adopt NGDP targeting without political cover.

    Right now, all political power and much of your own profession oppose or ignore what you propose and The Bernank isn’t going to bet his institution on NGDP targeting because you write “The Fed is legally allowed to do NGDP targeting”; no bureaucrat ceases bureaucrating because reason.com is writing “X is unconstitutional”.

    Those kind of statements imply that law & politics have a single central “legal” truth to complexity that need only be spoken to be accepted. But that’s wrong, moving a complex political/legal case forward requires powerful people to be convinced, sidelined or overcome. What interest compels a powerful player to adopt a revolutionary (sounding) NGDP targeting policy that every politician and many economists oppose or ignore?

    Waldman is helping, he’s sketching the legal scaffolding that houses the Fed, situating the politics. Hopefully, that discussion progresses to a consensus picture that easily accommodates NGDP targeting (i.e., its a mild policy “adjustment” not a rejection of what everyone believed yesterday). When that legal model generates soft pre-approval from legislative guardians and gives The Bernank cover to “interpret” his mandate in this new way, you’ll have a chance.

    A lot needs tending to. Unless you build some consensus among your ilk, it won’t happen. Unless Waldman and other wonks build some consensus among their ilk, it won’t happen. And unless a relevant political group has its interest mollified, it won’t happen (my guess on that front is Democrats, who need to demonstrate economic competence within the next 12 months).

    PS: No cameras at the Toga party. Most potential outcomes are bad and none are important.

  28. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 11:42


    Its so strange to hear someone ALMOST get it, and then crash and burn.

    What possible reason do you have to think what matters is WONKS? OR the Bernanke?

    You just need the Tea Party. If the Tea Party WANTS NGDP targeting it will happen.

    And there is an OBVIOUS date at which you’d be perfectly set up to get agreement with this radical idea.

    Nov 2012, immediately after Rick Perry is President.

    And as I keep saying, if you just drop the NGDP from 5% to 3% or even 4% (which Scott has supported), you essentially have adopted a brutal inflation target (below 2%).

    Thats WHY you can win the Tea Party, we just sell it as the way of ham stringing the Fed.

    They will LOVE it.

  29. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2011 at 11:44

    Benji, what matters is people who OWN shit outright. Real wealth.

    What doesn’t matter is people who bought a house 5 years ago, are upside down, have no equity, and would be better off jingle mailing the keys.

    You are concerned about BANKS who own the houses, I want to see banks eat it.

    See the difference?

  30. Gravatar of Benjamin Cole Benjamin Cole
    20. September 2011 at 11:47


    I would prefer that banks prosper. I find prospering businesses are better for the economy and citizenry. I am a radical that way.

  31. Gravatar of ヘリマネは効くが、「ヘリマネ」は効かない by Scott Sumner – 道草 ヘリマネは効くが、「ヘリマネ」は効かない by Scott Sumner – 道草
    20. September 2011 at 14:31

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  32. Gravatar of Cassander Cassander
    20. September 2011 at 23:43

    It still seems to me that mailing people checks is a far, far better way of expanding the money supply than open market operations.

  33. Gravatar of John John
    21. September 2011 at 02:34

    Ben Cole,

    Saving rather than spending is what leads to an improvement in economic conditions. By saving I mean actual underconsumption by people who earn money by working, not reserves created out of thin air. A transition from greater spending to more saving doesn’t mean fewer jobs, it means different kinds of jobs. For instance if people cut back on eating out at restaurants in order to save for college, jobs in restaurants disappear while jobs at colleges grow so long as entrepreneurs are able to correctly anticipate demand/

    Savings are what allow for an accumulation of capital goods that leads to higher worker productivity. This higher productivity equates to more goods available in the economy therefore people have higher real incomes. You have to first produce before you can consume; a printing press does nothing to change that. You can’t create greater overall consumption (for an extended period) by handing out dollar bills.

    I’m curious what you think about Say’s law and the role of savings in economic improvement. For instance, what do you think of von Mises’ quote; “The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.”

  34. Gravatar of John John
    21. September 2011 at 02:40

    To follow up to that last post, prolonged recessions come from distorted price signals rather than a simple lack of demand. To paraphrase Hayek, unemployment results from a disequilibrium between what consumers demand and what businesses are actually producing.

  35. Gravatar of PrometheeFeu PrometheeFeu
    22. September 2011 at 13:28

    Thanks a lot Scott. Now I can’t get the image of Ben Bernanke dressed in a Peter Pan costume riding in the back of a little black helicopter screaming “I do believe in inflation!” while digging into a big bag throwing money out the open door. I am forever scarred and amused.

    Let’s be “serious”, if they want to do NGDP targeting, I want them to actually do a helicopter drop. (Not necessarily involving helicopters mind you) But ultimately, the whole buying Treasuries idea is nuts. It completely distorts the interest rate on Treasuries and teaches politicians that they can keep borrowing and spending because it’s not real money anyways. Just open an account for everyone at the Fed (initially accessible through your social security number) and credit said accounts with $X. Let people sign up to receive their money in a different manner if need be. Ultimately it doesn’t really matter how you do it as long as you give the cash to a lot of people simultaneously so there aren’t weird distortions as the few who got the newly printed bills percolate the effect through the system.

  36. Gravatar of Scott Sumner Scott Sumner
    26. September 2011 at 10:07

    Becky, The fiscal authorities can legally borrow a trillion dollars, drop a trillion dollars out of helicopters, and then sell the trillion dollars in debt to the Fed. That’s basically a helicopter drop, and it’s legal.

    Morgan, You said;

    “KING DOLLAR is Larry Kudlow’s phrase it is the belief that the Fed should have only one task: keep inflation low and the dollar strong.”

    That’s two tasks, which often conflict. Like now.

    Which is it?

    David, The Fed could certainly do it for several years, as the case gradually wound it’s way to the Supreme Court. But again, right now a zero IOR is effectively negative due to FDIC fees.

    OhMy, It’s a combined fiscal monetary operation.

    Bababooey, I think you misunderstand my point here. I agree the Fed isn’t likely to suddenly adopt NGDP targeting. But Waldman is wrong if he says it’s not legally entitled to. It is. The previous inflation targeting decision was the Fed’s decision, Congress played no role at all. It would be the same for NGDP targeting. My goal as a blogger is to change the minds of economists, which is the first step toward getting the Fed to change its mind. I’ve said that from day one, that the Fed does what a consensus of economists wants them to do. I am trying to change that consensus. Am I succeeding? Compared to what? Compared to what I expected to achieve I already succeeded beyond my wildest dreams. Compared to what needs to be done? We are 10% of the way there.

    The UK is already almost there, although they won’t say so publicly. The Fed doesn’t move first, it waits for foreign central banks to give it a test run.

    Cassander, I don’t agree. That boosts the public debt, and hence future tax rates.

    John, Hayek later changed his mind and agreed an NGDP shortfall was the key problem.


    Neither is a good way. NGDP targeting, level targeting, is best. It would not require the Fed to buy Treasuries.

  37. Gravatar of TheMoneyIllusion » Credit where credit is due TheMoneyIllusion » Credit where credit is due
    11. August 2013 at 12:56

    […]  I have several blog posts pointing out that (for Ricardian reasons) even “helicopter drops” don’t really solve the problem of liquidity traps, at least if you believe the […]

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