MMT isn’t helicopter drops

I see a lot of discussion of “MMT” by people who don’t seem to know what it is.  Here’s Bloomberg:

European Central Bank President Mario Draghi said the Governing Council should be open to ideas such as Modern Monetary Theory, while noting they’re closer to fiscal policy and should be directed by governments.

Draghi was responding to a question from European lawmakers about helicopter money and the best ways to channel funds to the economy in a way that helps inequality. He mentioned MMT and a recent paper by former Federal Reserve Vice Chairman Stanley Fischer — the adviser on Draghi’s doctorate — which said central banks should put money “directly in the hands of public and private sector spenders.”

“These are objectively pretty new ideas,” Draghi said. “They have not been discussed by the Governing Council. We should look at them, but they have not been tested.”

He added that such actions rely on decisions on distribution, and that’s not something for monetary policy.

It seems like Draghi doesn’t know what MMT is.  There no shame in that, I probably don’t either. But I do know one thing; MMT is not “helicopter drops” of money.  The term “helicopter drops” is actually just a metaphor for combined monetary/fiscal expansion, an option that has been discussed by monetarists and Keynesians for decades.  If you want to discuss helicopter drops (I don’t) then that’s fine, but please don’t call it “MMT”.

MMT is a theoretical model of the economy that has been widely ridiculed by economists on both the left and the right, and for very good reasons.  Thus (AFAIK), under MMT the rate of inflation is determined by fiscal policy.  If that were true, then central banks would be wasting their time in targeting inflation.

Inflation in the US has averaged 1.9% since 1990.  If MMT were true, then it would have been fiscal policymakers that caused inflation to be close to 2%, and not close to 0% or 5% or 20%.

Fiscal policymakers?


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17 Responses to “MMT isn’t helicopter drops”

  1. Gravatar of Brian Donohue Brian Donohue
    7. October 2019 at 12:43

    Sheesh, this doesn’t inspire much confidence in Draghi.

  2. Gravatar of ssumner ssumner
    7. October 2019 at 12:53

    Brian, In fairness, the press often equates MMT with helicopter drops, so I can’t blame him for being confused.

  3. Gravatar of Mike Sandifer Mike Sandifer
    7. October 2019 at 13:00

    Scott,

    My impression is that many MMT’ers think fiscal policy only exclusively determines inflation under specific circumstances, such as the central bank pegging the nominal rate at zero. They seem to think that then it’s whether and how much fiscal spending changes the demand side, versus the proportion of spending being on supply-side friendly versus bad supply side policies.

    For numerous reasons, I don’t think such an approach would work, but much more knowledgeable people like David Andolfato give such ideas much more credence than I do.

  4. Gravatar of Arilando Arilando
    7. October 2019 at 13:14

    Why are money drops a bad idea? Isn’t it an excellent solution when the rate drops to zero?

    As regards distribution, the current strategy of purchasing financial assets massively benefits the wealthy, who hold the vast majority of financial assets. Money drops (assuming they’re distributed roughly equally across the population) would be much more distributionally neutral.

  5. Gravatar of Christian List Christian List
    7. October 2019 at 14:52

    European Central Bank President Mario Draghi said the Governing Council should be open to ideas such as Modern Monetary Theory, while noting they’re closer to fiscal policy and should be directed by governments.

    Hmm. I thought Scott would write something like: “Progress guys, I told you so! We are this close to NGDPL targeting, this close!”

    I as well take Draghi’s speech as a sure sign that NGDPL targeting is virtually on the doorstep.

    Few weeks ago, Draghi said that it’s now “high time for fiscal policy” — and after that “high time” it was indeed.

  6. Gravatar of Benjamin Cole Benjamin Cole
    7. October 2019 at 15:54

    Sometimes discussions about macroeconomics strike me thusly: “It is not lift that provides an airplane with elevation, it is the wings.”

    So, we have money-financed fiscal programs, or we have helicopter drops, or we have quantitative easing concurrently to fiscal deficits, and we have Modern Monetary Theory.

    MMT is muddy in some spots, but then so is the idea that an increase in the endogenous money supply is any less or more inflationary then an increase in the money supply through helicopter drops.

    And why should the primary mechanism for increase in the money supply rely on lending by commercial banks? (that is, an expansion of the endogenous money supply).

    Stanley Fischer may not have embraced MMT as a theory. As a practical and necessary tool, money-financed fiscal programs make enough sense that serious thinkers, including Ben Bernanke and Stanley Fischer, have indicated they are open to the idea.

    Given globalised capital markets, a it is not clear what the effects of a lone central-bank are on a defined geographic area, such as a nation, when it tries to raise or lower interest rates or engages in quantitative easing.

    Imagine a global capital market with $350 trillion in assets. So the Federal Reserve board buys $2 trillion in assets. And this action has what effect upon the economy of the 48 states, Hawaii, and Alaska?

    I would not dismiss Stanley Fischer. The implementation of money finaced fiscal programs promises to be a mess. The consequences of another recession promise to be worse.

  7. Gravatar of Benjamin Cole Benjamin Cole
    7. October 2019 at 16:17

    Add on: although the implementation of money-financed fiscal programs promises to be a political mess, there is an out.

    Leave spending pretty much unaltered; that is the mess that it is now.

    Implement the fiscal-monetary stimulus through tax cuts. I recommend a holiday on payroll taxes, implemented whenever the economy sinks below some trigger points. The Federal Reserve buys Treasuries and places them into the Social Security trust fund to make up the shortfall.

    But, one could also implement a general cut in income taxes, again offset by Federal Reserve buying of Treasury bonds.

  8. Gravatar of Arilando Arilando
    7. October 2019 at 18:26

    Why woudln’t helicopter drops be a good policy in case the interest rate hits zero? Buying financial assets has not been very effective and is distributionally very biased in favor of the rich, who own most financial assets. Helicopter drops in the form of say, a certain amount of money deposited in each citizen’s bank account would presumably be more effective and would be much more neutral distributionally. Draghi’s comments about “decisions about distribution”, as if buying financial assets doesn’t have distributional consequenses, are quite strange.

  9. Gravatar of Benjamin Cole Benjamin Cole
    7. October 2019 at 19:07

    Arilando:

    I think “money give-aways” are a dubious form of MMT, or helicopter drops. Who gets the money? Egads, this is asking for a political firestorm. And why should anyone be given a claim on production for doing nothing?

    Why not just cut taxes? Yes, the tax code is unfair, yes, a tortured document. Yes, if the tax cuts target the rich, that would be “unfair.” (as well as not too stimulative. The problem today is not a shortage of capital, but too much).

    But there are “fair” ways to cut taxes, such as increasing the standard deduction, or a holiday on payroll taxes (a tax paid only by productive people and businesses).

    “Letting people keep more of the money they earn” certainly has a ring to it, is probably good economics, and would help the economy hit a NGDPLT.

  10. Gravatar of ssumner ssumner
    7. October 2019 at 19:40

    Mike, Who knows what they believe, I’ve never come across an explanation that made much sense. When they first attracted a lot of attention, MMT proponents told me I was wrong in claiming that monetary policy determined inflation. That said inflation was determined by fiscal policy. But who knows what they think. If Paul Krugman can’t figure it out, what hope do I have?

    Arilando, You said:

    “As regards distribution, the current strategy of purchasing financial assets massively benefits the wealthy”

    That’s completely false, but it’s a popular myth. How did Treasury bond holders do during the 1960s and 1970s?

    And there are much more efficient ways of providing monetary stimulus than helicopter drops, even at zero rates.

    Ben, You said:

    “And this action has what effect upon the economy of the 48 states, Hawaii, and Alaska?”

    I know that you enjoy typing, but wouldn’t it be more efficient to simply say, “50 states”?

  11. Gravatar of Arilando Arilando
    7. October 2019 at 19:45

    ssumner

    What is more effective? Asset purchases have not been very effective relative to the size of the asset purchases.

  12. Gravatar of Benjamin Cole Benjamin Cole
    7. October 2019 at 21:44

    Scott—

    As I was typing, being an older guy, I thought of the “lower 48” and the recent statehood for Alaska and Hawaii, and then also US territories like Guam. The Panama Canal Zone is no more, alas.

    So, here is nice riddle: Now that the Panama Canal Zone is not part of the US, do Federal Reserve policies have an impact there? Why or why not? Less or more than before?

    Does the Fed lowering interest rates and engaging in QE stimulate the Panama Canal Zone now? If Panama gave the zone back to the US, would then Fed policies get traction in the zone?

    How is Panama different from Guam, or Hawaii?

  13. Gravatar of Ralph Musgrave Ralph Musgrave
    8. October 2019 at 03:15

    “….under MMT the rate of inflation is determined by fiscal policy. If that were true, then central banks would be wasting their time in targeting inflation.”

    The logic eludes me. First, advocating method X for controlling inflation does not prove one thinks method Y is totally ineffective, if that’s what you’re accusing MMTers of saying Scott.

    Second, MMTers tend to advocate a COMBINATION of fiscal and monetary policy: specifically, when stimulus is needed, govt and central bank create new money and spend it, and/or cut taxes. Bernanke recently gave an approving nod to that sort of system.

  14. Gravatar of Michael Clifford Michael Clifford
    8. October 2019 at 05:00

    “…under MMT the rate of inflation is determined by fiscal policy.”

    Thanks to a long time arguing with Deficit Owls (an MMTer) on Twitter, I have come to learn that this isn’t quite true. MMTers only believe demand-driven inflation is caused by fiscal policy. However, owing to their Post-Keynesian roots, they believe that most excess inflation (say 1965-1982) is caused by supply-side shocks that keep passing through and pyramiding onto prices.

    I don’t think that’s correct, but that’s what they argue.

  15. Gravatar of Cove77 Cove77
    8. October 2019 at 06:59

    Scott, I read a lot of this as part of Draghi’s farewell tour…ECB went negative, were innovative (?), open to new ideas….Question where does LaGarde go? Isn’t she all about fiscal/mon co operation?/ joint initiatives ? ECB may look like a different animal in a few (post Brexit?) yrs?

  16. Gravatar of Cove77 Cove77
    8. October 2019 at 07:04

    Sorry don’t wanna imply Draghi/ECB were ever that forward thinking just him thinking about his legacy

  17. Gravatar of ssumner ssumner
    8. October 2019 at 10:12

    Arilando, It’s wrong to focus on the instrument of policy, whether interest rates or asset purchases, due to the “thermostat problem”. A more effective regime, say level targeting combined with “whatever it takes” would be far more effective than the current regime. They could achieve higher NGDP growth with less QE.

    Australia avoided recession in 2008-09 without cutting rates to zero or doing any QE.

    Ralph, You said:

    “if that’s what you’re accusing MMTers of saying Scott.”

    That’s exactly what I’m accusing them of saying. At least that’s what they tell me they believe.

    Michael, OK, but that doesn’t change my argument at all. They don’t think monetary policy determines inflation. Everyone (MMT or not) views fiscal and monetary policy as affecting demand side inflation, obviously, not supply side inflation.

    Cove77, The ECB problems are political, not technical. A big block of important countries want tight money. In that environment it will be hard for Lagarde to enact monetary stimulus. I wish her luck.

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