Tuesday, September 6, 2016

Bill Mitchell — Helicopter money is a fiscal operation and is not inherently inflationary

There was a Project Syndicate article (September 2, 2016) – The Unavoidable Costs of Helicopter Money – claiming that “In fact, there are major downsides to helicopter money”. Hmm. Should I read this article was my thought at the the time. Waste a few minutes of my life. I wondered if I could pen the article in advance and then check to see how close I was. The theme would be inflation. In that I was correct. But the author really innovated a bit and, in doing so, undermined his own argument. What we learn is fairly straightforward. If a government continues to increase nominal spending growth ahead of the growth in productive capacity then there will be inflation. The argument presented is, in fact, nothing to do with the monetary operations that accompany government spending – helicopter or otherwise. The inflation risk is in the spending. If private investment expenditure outstripped the capacity of the supply-side to produce the capital equipment demanded then the same outcome. Should we caution against such expenditure? Should be make it taboo? Obviously not.…
Bill Mitchell – billy blog
Helicopter money is a fiscal operation and is not inherently inflationary
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia


4 comments:

Gary Hart said...

Tom Hickey: Many times Bill Mitchell has said quantitative easing, "was introduced on the false premise that banks were not lending because they had insufficient reserves." But, as I recall QE was done to re-inflate asset prices in order to bail out the banks on the premise that economy would fail without the banks. Which claim is correct? Bernanke had to have understood how the system works and that increasing reserves wouldn't have increased lending.
Also, I read " The Unavoidable Costs of Helicopter Money " and I didn't get the sense that the author was equating QE with helicopter drops. I thought that he was comparing the two. I would like to know your interpretation.

Tom Hickey said...

Many times Bill Mitchell has said quantitative easing, "was introduced on the false premise that banks were not lending because they had insufficient reserves." But, as I recall QE was done to re-inflate asset prices in order to bail out the banks on the premise that economy would fail without the banks. Which claim is correct? Bernanke had to have understood how the system works and that increasing reserves wouldn't have increased lending.

There were three stages of QE preceded by Fed intervention to provide emergency liquidity on an as needed basis before QE. I would dis regard what the authors put forward by way of explanation. That's designed to influence behavior. IN my view QE was chiefly about supporting asset prices, in particular housing.

As I recall reading that piece, I think he was thinking of passing out cash (Friedman's helicopter money) as being the same as the cb crediting bank accounts. I think where the issue arises is the way the phrase "printing money" is used. HM and QE are both seen as "printing money."

Gary Hart said...

I agree with you and if the purpose was to inflate asset prices it worked.

Tom Hickey said...

I agree with you and if the purpose was to inflate asset prices it worked.

The way that BB had expected, though. He aimed at increasing asset price level to produce a "wealth effect" that would spur spending without bank lending or increasing the fiscal deficit. The "wealth effect" didn't pan out as hoped.