It’s all about the Benjamins

You have to be careful when reading Tyler Cowen’s posts.  Whereas I can ramble on and on saying very little, he condenses a lot of ideas into very short posts.  When I first glanced at this post two things stuck out; Tyler didn’t understand the “helicopter drop of cash” and he confused me with Milton Friedman.  On closer examination he does understand the helicopter drop, and I have no complaint if people start associating me with ideas that Friedman actually developed.  In fact there is a long tradition of this in economics, recall the “Phillips Curve” was actually first popularized by Irving Fisher.  Here’s what Tyler has to say:

$250 for each senior or $13 billion in total.  It’s bad precedent to go around a COLA calculation, even on a one-time basis, but you can construct a partial defense of the policy (here is Matt’s semi-defense).  Think of it as a helicopter drop of money, a’la Scott Sumner.  If the helicopter drop substitutes for (part of) a second fiscal stimulus, that’s a net gain.  .  .  .   How will the expenditure be financed?  Obama was vague on that, but as usual the Fed moves both first and last in the monetary policy game.  All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been, wink and nod to Ben B., and it is all (or mostly) for the better.

My first thought was that Tyler was confusing fiscal and monetary policy.  The $13 billion would not directly impact the money supply.  But in the final sentence he alludes to his assumption—a larger fiscal stimulus would lead the Fed to adopt a more accommodative monetary stance.  This raises two questions; precisely what would the Fed have to do to turn it into a helicopter drop, and how plausible is this assumption?

The first question is easy to answer; they’d have to permanently increase the monetary base by $13 billion, relative to the trajectory they had planned before the fiscal authorities came up with this bright idea.  At first glance that might look reasonable, after all, didn’t Congress just pass a $800 billion dollar fiscal stimulus, and didn’t the Fed also increase the monetary base by roughly $800 billion?  Surely that can’t be coincidence?  In fact it is.  The monetary injection did not constitute “monetizing the debt,” and for two different reasons.  First, the Fed made it clear that the injection was merely temporary.   They repeatedly asserted that the money would be withdrawn from circulation before inflation became a problem.  And just to make sure, they paid banks to lock up the full $800 billion in excess reserves.

But what about additional fiscal stimulus?  How would the Fed respond?  I suppose anything is possible.  Tyler argues for accommodation; that fiscal stimulus would lead to a more expansionary monetary policy.  I seem to recall Krugman arguing that it would have no effect.  I think the most likely scenario is that monetary policy would roughly sterilize fiscal stimulus.  The Fed has some sort of policy goals, or at least some minimum level of aggregate demand that they find acceptable.  If fiscal stimulus doesn’t get us there, the Fed would be more aggressive.  If fiscal stimulus does boost AD, then the Fed would be less aggressive.  I make no claim that there is anything like a precise offset, although I have suggested that the “multiplier” might well be negative under some fairly plausible assumptions.  But I don’t see the “helicopter drop” assumption of a positive correlation to be very likely.  Indeed it also goes against statements by Fed officials.

Tyler’s post also makes a few other interesting points.  He’s right that the “one-time” violation of the COLA formula sets a bad precedent.  How many “one time” tax amnesties have we had?  But the Matt Yglesia post he links to also has a reasonable “semi-defense” of the move as a second best policy which heads off something worse.  The Yglesia article is also interesting for another reason; if Matt Yglesia is right, then this particular fiscal policy is a textbook example of “money illusion.”  Almost every press story on the COLA treats the lack of a COLA adjustment as a bad thing for seniors, whereas it is actually a good thing, as even without the $250 they would have had their biggest increase in real benefit levels in decades.  Why?  Because nominal benefits cannot fall, even during deflation.  Whether Congress has money illusion, or whether they are responding to money illusion among the press and public is immaterial.  There is money illusion somewhere in the system.  There is no way Congress would have overrode the COLA formula for one year if prices had been rising, not falling.

Although it is clear that Tyler does understand the distinction between fiscal stimulus and a helicopter drop, I wanted to emphasize these points in case someone quickly skimming the post assumed (as I originally did) that Tyler claimed I thought the $250 windfall for seniors constituted a helicopter drop.  If that’s what the government really wanted to do, they would hand each person over 65 an envelope with two pictures of Benjamin Franklin and one of Ulysses S. Grant.  Speaking of which, isn’t it time for some new faces on our currency.  There must be a number of 2oth century figures at least as respected as Grant.   The two Roosevelts, Martin Luther King, etc.  (And that’s not even considering figures who were outstanding Presidents but who are not respected, like Calvin Coolidge.)  But why honor dead people at all?  Isn’t that a waste?  Economic theory suggests that we should be able to cash in on the privilege of being on the fifty.  You’re probably thinking that I have in mind a plan to sell the rights to the highest bidder, a rich person with a big ego. The “Trump” bill.  I’m not that crass.  I was thinking of a more subtle use of economic theory.  How about using the privilege to motivate better performance?  Isn’t economics all about incentives?  I suggest putting Obama on the $50.  Surely when Obama saw that he was in the midst of other greats like Washington, Lincoln, and Andrew Jackson, he would feel even more motivated to live up to the honor, to make his presidency worthy of being in that select group of dead presidents.  Franklin Roosevelt can’t be motivated any longer, but Obama can.

Indeed, perhaps all honors should now be decided not on what the various candidates have done, but on how much the honor could motivate them to reach even greater heights.  Indeed, how about the  .  .  .   Oh wait, someone beat me to the idea.  How come someone else always thinks up great ideas before I do!

Speaking of currency, why do we have technological progress in so many fields, but regress in the public arts?  If you want to know what I really think about cash, I prefer the mythological figures that used to adorn our currency and coins.  The old designs were far more beautiful, and we already have too much hero worship.  When presidents are in office they are often viewed contemptuously.  Later they are revered.  But the first reaction was more accurate.  The contemporaries are the ones that knew them best.  They really are just schmucks just like us, who put their pants on one leg at a time.  I say get rid of all the dead presidents and bring back the beautiful Education Series of bills from 1896, and the attractive silver coins from the interwar years.  (Of course we have so debased our currency that we could only use silver plating today.)

PS.  I wish I could tell you that I’m back, but my posts will continue to be infrequent for quite some time.



19 Responses to “It’s all about the Benjamins”

  1. Gravatar of Bob Murphy Bob Murphy
    16. October 2009 at 20:20

    Scott, how can someone so awesome–who talks about our currency being debased–be known for the One Big Idea for which you’re known?

  2. Gravatar of Peter Thoenen Peter Thoenen
    17. October 2009 at 01:55

    You made me smile with this post Scott … even had to read it twice to make sure I read it correctly; very nice tongue in cheek. Thanks for livening up my hung over Saturday morning.

  3. Gravatar of ssumner ssumner
    17. October 2009 at 04:58

    Bob, I wish you had known me in the 1970s. I was obsessed with the problem of inflation. In 1980 I made money selling silver coins for 10 times what I had paid for them a few years ealier. I recall in 1980 there was a gas station in Chicago selling gas for 10 cents a gallon, as long as you paid with a dime minted before 1964. I loved “hard money.”

    But times change and problems change. I’ve become a wimp.

    Thanks Peter, I’m not sure whether my posts seem better to a drunk person, or to someone merely hung over.

  4. Gravatar of Mike Sandifer Mike Sandifer
    17. October 2009 at 07:07

    Correct me if I’m wrong, but didn’t many, if not all of the founders reject the idea of the government producing images of people in general? If so, then it is the ultimate irony to put Washington, Franklin, and Hamilton on our currency.

  5. Gravatar of q q
    17. October 2009 at 08:07

    so what you are really saying is that they should put a ‘$50’ on the $20 bill, right?

  6. Gravatar of Bill Woolsey Bill Woolsey
    17. October 2009 at 09:56


    What is Sumner’s “One Big Idea?”


    What do you think Bob consider’s your “One Big Idea?” Is it a correct summary?

    As for Tyler’s implicit model, I think it is obvious.

    The Fed is targeting short term interest rates. If the Treasury gives out billions of dollars to old folks, it will borrow the money by sellng bonds. To keep this from rising short term interest rates, the Federal Reserve open market trading desk will buy the bonds with new money created out of thin air. This is the way the government creates money and gives it away–helicopter drops.

    As for the question of how permanent these changes would be, I am not sure that your question makes much sense outside of a very peculiar policy regime–base money targeting.

  7. Gravatar of ssumner ssumner
    17. October 2009 at 13:23

    Mike, That sounds right to me, but I am not certain. They were opposed to the President being too much like a king or emperor.

    q, I’m always a bit slow with humor. Does that joke refer to the debasement of money? Or that Obama a demogogue like Andrew Jackson.

    Bill, I think Bob would say that my big idea is that we can solve all our problems by printing money. But I’ll let him answer. Seriously, that is a good idea for a post. I don’t think I have any single big idea, but 3 or 4 interconnected ideas that stake out a distinct position on money/macro. I don’t know that I’ve ever sat down and tried to define my views, but I think I will do a post on that.

  8. Gravatar of StatsGuy StatsGuy
    17. October 2009 at 14:33

    Regarding the very narrow policy implications of the $250 expansion of benefits… recognize that Medicare benefits are separate from Social Security payments, so even without the $250 this is still a net increase in payouts in spite of a 1.6% reduction in prices year over year…

    MOREOVER, this year’s flat value came after a 5.8% increase, the largest in over 25 years.

    As noted in the linked file, the people who lose out are those who begin social security this year, who will have permanently lower payouts. In other words, the system not only grandfathered those already in the system, but gave them a reward, all at the expense of those not yet there…

  9. Gravatar of StatsGuy StatsGuy
    17. October 2009 at 14:56

    While I’m on the topic of intergenerational equity, I wanted to ask for opinions about the impact of the recent move to mandate pre-payments of retirement benefits on money velocity. Specifically, the _current_ generation of employees is about to be required to pre-pay retirement benefits over a period of 30 years, while ALSO paying retirement benefits for the abundantly oversized Boomer population, while ALSO paying down the debt the Boomers incurred during the Reagan/Bush II tax holidy/spending binge.

    I just attended a town meeting this morning wherein I was informed that the cost of pre-funding benefits plans (while covering existing benefits for those who were not pre-funded) would be greater than 1/3 of the entire cost of the local public school system. This money will sit in an account perpetually (much like the Calpers system). Here is my question: what, exactly, happens when thousands of municipalities all simultaneously begin to follow through?

    And here’s an odd thought for the anti-government folks… The #1 factor which seems to help limit the growth of government expenditures as a % of total GDP seems to be a stable positive inflation (or NGDP) rate. For all the talk about the stimulus, the much greater concern is the huge fall in tax receipts along with the automatic spending stabilizers (which includes, btw, the military – which just had a gangbuster year recruiting). Practically speaking, the best way to cut government share of GDP – which worked in the Clinton years – is to achieve stable monetary/GDP growth while holding fiscal expenditure constant.

  10. Gravatar of Bob Murphy Bob Murphy
    17. October 2009 at 17:56

    Scott’s Big Idea is that the recent unpleasantness was due to tight money.

    Scott, if I had known you in the 1970s, you would have had to change my diaper every two hours.

  11. Gravatar of TGGP TGGP
    17. October 2009 at 18:14

    When presidents are in office they are often viewed contemptuously. Later they are revered. But the first reaction was more accurate. The contemporaries are the ones that knew them best.
    Reminds me of something Brian Doherty said about how wars are viewed years later. I wish I could find a link to it.

  12. Gravatar of The Arthurian The Arthurian
    18. October 2009 at 00:20

    Stats Guy, I’d say the numbers show that Clinton reduced the government share of GDP mostly by cutting the military budget.

    Scott, when you do your “My Big Idea” post, please include something on how NGDP targeting keeps the economy growing rather than fizzling out as mere inflation. The only thing I can think of is that a growing economy has “momentum” and wants to keep growing.

  13. Gravatar of StatsGuy StatsGuy
    18. October 2009 at 04:47

    Arthurian – that’s a very common opinion, and very wrong.

    Notably, the total size of the civilian federal labor force INCREASED under Reagan (1980 to 1988) from 2770 to 3054 thousands, held stead under Bush II (whose administration I frequently praise), dropped sharply under Clinton (3017 to 2639), and then increased again under Bush II (back up to 2692).

    One can raise an argument about a shift toward contracting (true), but the data on Federal Govt as % of GDP are roughly similar. The only thing that Reagan and Bush II cut was tax revenue, which resulted in huge increases in the Debt as % of GDP, which explains much of our current predicament.

    Clinton (and the Republican Congress of 1994 – which also deserves partial credit for cutting the civilian labor force) did cut military troop levels, but most of those cuts were Cold War drawdowns and force reconfiguration. (And how many B-52 bombers and Trident submarines have seen action since 2000?). As has commonly been noted, Clinton/Gore helped structure the military that was deployed successfully in 2003 by GWB in the opening days of the Iraq War.

    Here is the labor data:

    Year Executive branch civilians (thousands) Uniformed military personnel (thousands) Legislative and judicial branch personnel (thousands) Total Federal personnel (thousands)
    1962 2,485 2,840 30 5,354
    1963 2 2,498 2,732 30 5,260
    1964 2 2,470 2,719 31 5,220
    1965 2,496 2,687 32 5,215
    1966 2,726 3,129 33 5,888
    1967 2,968 3,413 34 6,416
    1968 3,020 3,584 35 6,639
    1969 3 3,040 3,499 36 6,575
    1970 4 2,944 3,104 38 6,085
    1971 4 2,883 2,752 40 5,675
    1972 2,823 2,360 42 5,225
    1973 2,781 2,289 44 5,113
    1974 2,847 2,198 46 5,091
    1975 2,848 2,164 49 5,061
    1976 2,833 2,119 50 5,002
    1977 2,840 2,112 53 5,005
    1978 2,875 2,099 55 5,028
    1979 2,823 2,063 53 4,939
    1980 4 2,821 2,090 55 4,965
    1981 4 2,806 2,122 54 4,982
    1982 2,770 2,147 55 4,972
    1983 2,820 2,163 56 5,039
    1984 2,854 2,178 56 5,088
    1985 3,008 2,190 58 5,256
    1986 2,966 2,206 55 5,228
    1987 3,030 2,213 58 5,301
    1988 3,054 2,176 59 5,289
    1989 3,064 2,168 60 5,292
    1990 4 3,067 2,106 61 5,234
    1991 4 3,048 2,040 64 5,152
    1992 3,017 1,848 66 4,931
    1993 2,947 1,744 66 4,758
    1994 2,908 1,648 63 4,620
    1995 2,858 1,555 62 4,475
    1996 2,786 1,507 61 4,354
    1997 2,725 1,439 62 4,226
    1998 2,727 1,407 62 4,196
    1999 2,687 1,386 63 4,135
    2000 4 2,639 1,426 63 4,129
    2001 4 2,640 1,428 64 4,132
    2002 2,630 1,456 66 4,152
    2003 2,666 1,478 65 4,210
    2004 2,650 1,473 64 4,187
    2005 2,636 1,436 65 4,138
    2006 2,637 1,432 63 4,133
    2007 2,636 1,427 63 4,127
    2008 2,692 1,450 64 4,206

  14. Gravatar of ssumner ssumner
    18. October 2009 at 08:48

    Statsguy. Thanks. It wasn’t until the second time I read that link that I understood their point. It is very similar to the distortion caused in TIPS spreads by the fact that the par value of new TIPS can’t fall.

    I wonder if that age group will figure out how they are getting screwed. I don’t think it’s quite 5% though, which is the figure in the article, isn’t it merely the amount of deflation (more like 1.5% or 2.0%?)

    statsguy#2, I don’t think those pensions changes would have a big impact on velocity, and I think any impact could be easily offset. But I can see how people might be concerned about this. In the Keynesian model it would be contractionary. So it is just one more reason monetary policy needs to be more aggressive.

    Yes, I have repeatedly argued that good monetary policy is the best way to keep government smaller, and to fight back against protectionism, subsidies for dinosaurs like GM, etc.

    Bob. In that case I’m really glad I didn’t know you in the 1970s.

    TGGP, Yes, I’m sure I got the idea from somewhere else.

    The Arthurian, Some was lower military spending, and some was cyclical factors (1992 was recession year and 2000 was a big boom.) But I think even cyclically adjusted domestic spending was surprisingly restrained. Other than the higher MTRs, I think Clinton did a find job (perhaps with some nudging from Gingrich.) And even the higher MTRs on ordinary income was offset by the lower MTRs on cap gains.

    I’d just add that Reagan was a bit better and Bush II was a bit worse if you look at spending as a share of GDP, not employment. Domestic spending as a share of GDP fell under Reagan, and rose under Bush II.

  15. Gravatar of StatsGuy StatsGuy
    18. October 2009 at 22:04

    Re: 5% drop for the current age cohort…

    Not entirely sure how they got the 5% number. I think it might be because the 1947 cohort (relative to earlier cohorts) double-counts the negatives. They enter below par, but still need to absorb the no-COLAs for a couple years because the projected adjustment (5.8% adjustment, based on the prior year) was so much higher than actually required, even though they did not get the benefit of the projected. They are “working off” a COLA that they did not get (but others did).

    In other words, the system uses LAST year’s CPI-W to gauge next year’s adjustment, and the pre-47’s got a COLA that overpredicted real increase.

    Also, not that the COLA is based on average year-over-year differences across July/August/September (when fuel prices were high).

    1947 enters at -2.1% below par while everyone else is above par by the difference between 5.8% and what they _should_ have gotten (~3% or so). Inflation has to make it back to Par (2.1%), and then recover the overadjustment, before making gains (projected to take till 2012). So 1947 gets hosed.

    Pre-1947 got a temporary bonanza that they have to work off, though I’m sure they’ll be complaining bitterly.

  16. Gravatar of ssumner ssumner
    19. October 2009 at 09:58

    Statsguy, You may be right, but my understanding is that the initial Social security payment is not based on the CPI at all, it is based on a wage index. I am pretty sure about that. So their initial payment is unaffected by the CPI distortion, and then they get 2.1% less of a COLA than they should get as the deflation is worked off.

    But this stuff confuses me. So if you’re pretty sure they’re right, I’ll take your word for it.

  17. Gravatar of StatsGuy StatsGuy
    20. October 2009 at 08:05


    “So if you’re pretty sure they’re right, I’ll take your word for it.”

    Hah hah! Don’t! I am completely guessing at how they got 5%. After an hour rooting around the SSA website, I was still scratching my head.

  18. Gravatar of The Arthurian The Arthurian
    23. October 2009 at 00:11

    The days go by…

    StatsGuy, Table 453 of the 2009 Statistical Abstract was still fresh in my mind on the 18th. Thanks for the OPM link. Your specific remark (to which I responded) was “the best way to cut government share of GDP – which worked in the Clinton years – is to achieve stable monetary/GDP growth while holding fiscal expenditure constant.”

    It is not my intent to point fingers at any politician or any group of politicians. I was wondering why Bush II could only deliver one-third the troops that Bush I delivered to Iraq. Methinks the trouble must be troop cuts — not B-52 bombers or Trident submarines. And there was only one administration between the Bushes.

    Scott, thanks for refreshing the “spending as a share of GDP” topic…. On this subject, though, I sometimes wonder aloud how reasonable a solution it is to reduce government spending as a share of GDP. GDP is already too small. The slow growth of GDP makes “federal spending as a share of GDP” larger. But this is not evidence that government growth is excessive. It is only a property of fractions.

  19. Gravatar of ssumner ssumner
    24. October 2009 at 04:46

    The Arthurian, I think it is both problems; NGDP should be bigger, and nominal federal spending should be smaller.

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