Sunday, February 22, 2015

Simon Wren-Lewis — Helicopter money and the government of central bank nightmares

So why exactly is real helicopter money — QE is not real helicopter money — taboo, Simon Wren-Lewis asks? 

Now we are getting somewhere.

The problem is the fiction of central bank independence from government to give technocrats a leash on elected politicians, who the financial community does not trust. 

When the central bank and Treasury are consolidated, and monetary policy and fiscal policy are views as two sides of the same coin — economic policy, then the issues disappear. 

his is pseudo-problem resulting from a distrust of democratic governance. 

The upshot is that the financial community prefers to protect itself from the bogeyman of government at the expense of the economy and at the cost of real underperformance and unemployment for supposed financial "protections."

Mainly Macro
Helicopter money and the government of central bank nightmares
Simon Wren-Lewis | Professor of Economics, Oxford University


Brian Romanchuk said...

It is taboo in central banking circles because such a policy would be illegal. The central bank cannot just hand out money to people. They can lend against assets, etc., within a pre-existing legal framework.

And even if you consolidate the central bank and Treasury, "money-financed deficits" make no analytical sense if you think there is a chance of non-zero interest rates in the future. Even if you "finance" spending with money now, in the future, it would be necessary to issue the bonds to drain the money to keep rates at their non-zero target. And that holds whether or not you follow a modern mainstream or a MMT description of the monetary system. (It might not apply to IS/LM, but that is because IS/LM is a bit of a joke.)

The only way to "permanently" increase the monetary base is to lock interest rates at zero forever (the Mosler/Friedman rule).

Tom Hickey said...

But why is it illegal. That just pushes the question of why it is taboo back a step.

And I understand that it is not illegal in the UK, for instance (Neil?). After all, it is the politicians imposing the restraint on themselves through the central bank, which they instituted and control.

Non-zero interest rates in the future make no difference if the policy rate is set to zero as you say, or if the CB pays IOER instead of using OMO to target its policy rate and doesn't need to control quantity of rb to set the rate.

Look at it in terms of fixed rates under a gold reserves. If the gold reserves would increase through discoveries that the cb chose to purchase then the money supply would increase. This is actually happening in Russia right now, increasing liquidity through the cb without affecting the fiscal balance.

What does gold add operationally? Nothing, really, other than that the cb has some inert metal in the vault and some numbers on the asset side of its balance sheet. The cb has the same power to create rb regardless, although the accounting entries are different. No big thing.

Brian Romanchuk said...
This comment has been removed by the author.
Brian Romanchuk said...

It's illegal because central bank independence does not mean it can do whatever it wants, it has to work within a legal mandate. Parliament has supremacy when it comes to spending government money. That's the English system that Canada inherited; I think the U.S. system is similar.

It would be completely unaceptable that an unelected bureaucrat could hand money to whoever he/she feels like without any accountability to lawmakers.

QE is different because the central bank can only lend against/purchase a limited set of assets that are described in statute. The emergency powers used in the crisis widened the Fed's scope, but they would have to be justified.

Tom Hickey said...

The US Congress delegates monetary policy to the Fed. It cannot delegate at least part of fiscal policy to the Fed, e.g., helicopter drops, if the majority chooses to do so? Of course it can.

Congress approved sending out transfers which were essentially helicopter money during the Bush administration. Incidentally, as WM reports, shortly after he met with Andy Card, then Chief of White House Staff, and told me that they needed to get more $ into the economy pronto. The WH requested the transfer and Congress appropriated it.

There is no reason that Congress could not just give this ability of crediting bank accounts to the Fed as an emergency power, as it did the power to conduct monetary policy by issuing IOER, which is fiscal in so far as it debts non-government accounts.

The reality is that economic policy space is restricted voluntarily by conservatives in order to impose "discipline," which is not relaxed in emergencies, which it clearly needs to be to operate the economy efficiently and effectively. But that would upset conservatives and the financial community.

Brian Romanchuk said...

Sure, if there was a well-defined programme. It may make sense to have it done by the Fed, as they supposedly are monitoring the economy with the best people.

But it raises all kind of issues. If it's done on the basis of bank accounts, what about poor people who do mot have a bank? If it's only for emergencies, you would have to build an infrastructure to support payments that might be made once per decade.

If you do it as a tax cut, it is only useful for people paying taxes.

This would be one advantage of an income guarantee - you could just increase the amount if extra stimulus was needed.

Tom Hickey said...

I am not arguing for it. I disagree with central bank independence as anti-democratic.

But if there is going to be an independent central bank then it should be given broader emergency powers, since the existence of independent central banks gives politicians cover to pass tough decisions to the central bank. If the central bank is not capable of acting because its powers are too limited, then we are the situation we are now in the US, UK, and EZ with lagging demand, economies underperforming and abnormally high UE, even through a fix is both known and available.

Presently the central bank has to work pretty via the financial system, and that has shown itself to be insufficient to the task. Providing banks with liquidity does not induce them to lend and low rates don't induce firms to borrow in the face of chronic low demand.

Ryan Harris said...

The constitution prohibits the executive branch from collecting or spending funds not appropriated by the legislature. AND congress is required to set amounts and duration of each appropriation they can't be open ended, or for unspecified amounts.

off topic, but the biggest risk IMO to the entitlement programs by conservatives, it hasn't been challenged YET, But a congressman would have standing to challenge the entitlement programs because they are clearly in violation of these requirements because they independently collect and spend in perpetuity and set tax rates and spending amounts without congress giving their approval or denial.

Tom Hickey said...

The constitution prohibits the executive branch from collecting or spending funds not appropriated by the legislature. AND congress is required to set amounts and duration of each appropriation they can't be open ended, or for unspecified amounts.

Then is IOER illegal under the Constitution? It increases $NFA, so it is definitely fiscal.

Brian Romanchuk said...


I wrote up my views in a longer form here:

I do not think we disagree much, other than I have a strong bias towards automatic stabilisers like a Job Guarantee. Implementation of a fiscal programme by a central bank is tricky, as I discuss.

Calgacus said...

Ryan, the courts have already ruled against your interpretation if I understand it correctly. If an earlier Congress has created a "government obligation" later Congresses cannot undo it, and the executive can & must spend even without an appropriation. Most "entitlements" like SS if that is what you mean are not considered "government obligations" though. But they don't spend the way I read you as saying, but according to the will of each Congress.

Tom Hickey said...

Thanks, Brian. I put up a link.

Ryan Harris said...

The constitutions says, "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law "
A previous congress can spend into the future and it is legal. But they can't make an open ended, unspecified appropriation that essentially turns over to the executive branch the power of the purse to tax and spend beyond what was or could have been imagined as "appropriate" by the congress. Without congressional oversight and intelligible rules on how that spending is to be carried out, it violates rules of non-delegation. Something like social security does have rules that are understandable for regulators to carry out congressional wishes and probably passes muster as long as congress provides oversight, review and regulation. When they make an appropriation, they are deciding technically the "appropriate" expenditure for government. When something like medicare could easily be in violation of the anti-deficiency act as expenditures are to be much larger than revenues and congressmen have openly been expressing opinions that the program is "unsustainable", "too expensive" and other indications that the program is "making or authorizing an expenditure or obligation exceeding an amount available in an appropriation." Additionally, the congress has refused to make permanent adjustments to the compensation contracts the government pays for medical services. They keep having to temporarily extend the increases in what congressmen have been calling "kicking the can." So there are some reasonable doubts as to whether the programs will be meeting the requirements of the miscellaneous receipts and anti-deficiency laws unless congress explicitly allows them to spend money not yet collected and spend in excess of what is collected. Consider, this is part of the legislation: "If the Board of Trustees of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, or the Federal Supplementary Medical Insurance Trust Fund determines at any time that the balance ratio of any such Trust Fund for any calendar year may become less than 20 percent, the Board shall promptly submit to each House of the Congress a report setting forth its recommendations for statutory adjustments affecting the receipts and disbursements of such Trust Fund necessary to maintain the balance ratio of such Trust Fund at not less than 20 percent, with due regard to the economic conditions which created such inadequacy in the balance ratio and the amount of time necessary to alleviate such inadequacy in a prudent manner"

So clearly congress didn't intend the programs to ever collect less than they pay out!
I'm not arguing that I think this SHOULD happen, but that it probably WILL be challenged and force congressional action.

Ryan Harris said...

I think IOER is legal because the acts of congress specify how much the Fed is going to spend, "to be paid by the Federal Reserve
bank at least once each calendar quarter, at a rate or
rates not to exceed the general level of short-term interest
rates" and then they go on and direct the fed on how to pay it out so it meets the technical requirements that congress appropriate the amount.

Tom Hickey said...

If lawyers can justify torture based on the Constitution and treaties banning it, I doubt they would have trouble coming up with a legal rationale for helicopter money.

Neil Wilson said...

"And I understand that it is not illegal in the UK, for instance (Neil?)."

Nothing is illegal until there is somebody prepared to stop it under any legal system.

So the question is where is the enforcement mechanism?

People may restrain themselves from doing something though 'fear', but that is not the same as something being stopped by the law enforcement system.

Hence we have this elaborate illusion in all countries when everybody knows that there isn't anybody who is prepared to bounce a government cheque should the government insist.

And that is the key MMT point. There is no legal authority in any country for the banking system to defy the will of the legislature.

If legislation is drafted in Texas for example, then the supreme court of the USA can stop the Texas state government from spending the money and would be able to make it stick. The supreme court couldn't do that to a federal appropriation - if all the relevant laws were changed. Nothing in the constitution allows the courts to strike out a federal appropriation.

Similarly in the UK, the EU treaty is only given force in UK law by virtue of an Act of Parliament. If a determined government said that it wished to borrow directly from the Bank of England, and put that into the legal system correctly then no UK court would order the Bank of England to bounce the cheque.

The USA fought a war to remove the legislative veto from the States. In the European Union Supremacy of their Jurisprudence is incorporated into national law frameworks in a more piecemeal fashion.

Neil Wilson said...

"Even if you "finance" spending with money now, in the future, it would be necessary to issue the bonds to drain the money to keep rates at their non-zero target."

Would it? Don't you just pay 'Interest of Reserves' at that rate instead.

That's just money creation. Payment of a dividend to a fraction of the population based upon certain wealth holdings. A form of benefits in other words, but benefits paid by the monetary authority, not the fiscal.