Thursday, February 26, 2015
Simon Wren-Lewis — Can helicopter money be democratic?
Simon Wren-Lewis asks the fundamental question.
Helicopter money is by definition central bank policy. Can that be democratic is the central bank is to remain politically independent? It would seem not.
Moreover, helicopter money is fiscal. It increases the net financial assets of non-government whereas
Mainly Macro
Can helicopter money be democratic?
Simon Wren-Lewis | Professor of Economics, Oxford University
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24 comments:
We might ask Simon whether Money (bank-credit) is democratic. The answer to that might inform the rest of that thought.
In the US, Congress has delegated the power of monetary policy to the central bank and made the central bank politically independent, thereby putting a small group of technocrats in charge, many if not most of whom have connections with banking and the financial industry.
Similarly, Congress has delegated some of the the power of money creation to the banks through credit extension, and providing banks access to the central bank.
However, Congress retains much more control over the banks that it does the central bank. Congress has established regulatory agencies, for example, that monitor banks closely on a regular basis.
So I would say that while the central bank is really anti-democratic, the banking system is at least supervised by officials empowered appointed by elected representatives. Congress empowers the banking system but limits this by regulation, which is handled by the executive branch that answers to the president, and the key appointees also have to be approved by Congress.
At the same time banks independently control the credit process for the most part, which amounts to give them control over the allocation of capital. That's a lot of control that is delegated to interested parties, opening the possibility of conflict of interest, favoritism, and corruption.
But that's the uneasy marriage of capitalism and democracy. They can't really live with each other in peace and they can't really get a divorce either.
Helicopter money is by definition not central bank policy because it is fiscal policy and CBs can't do it.
Helicopter money is by definition not central bank policy because it is fiscal policy and CBs can't do it.
Peter P,
The fact that there’s an inevitable fiscal element in helicoptering doesn’t alter the fact that central banks can print money and dish it out (if the law is changed in such a way as to let them do that). And it’s clearly wrong for the central bank to have SOLE discretion over the fiscal element there. That’s undemocratic. Thus assuming helicoptering is a good idea, we’re forced to answer the question: “What’s the best way to get politicians and voters involved?
That’s the question that Wren-Lewis addresses.
Tom,
You are right to say that in the US “a small group of technocrats….. who have connections with the financial industry” have been given huge powers.” That’s an obvious conflict of interest. In the UK and Europe, it’s different: the relevant individuals tend to be academics and central bank staff, which I think is better.
Re the “regulators” to which you refer, they’re near useless.
The democratic element in the commercial bank sector derives from the fact that it’s driven largely by market forces: e.g. if the people want more cars and fewer houses it will pay banks to lend to car makers and car buyers and offer fewer mortgages.
"That’s the question that Wren-Lewis addresses"
But not in the obvious way of 'let parliament decide on what money goes where'.
They are already elected and there are 650 of them. You don't need anybody else electing and you certainly don't need a cabal.
These people are far too wedded to the idea of an elite controlling the money. Which is a dangerous concept in a democracy - as we've seen with the spat in the Eurozone.
" the relevant individuals tend to be academics and central bank staff, which I think is better."
Just another House of Lords, Privy Council or Knights of the Garter, based on the outdated concept that some people are superior.
They are not, as they demonstrated in 2008.
The existing House of Lords had its financial veto revoked in 1910. It has not been reinstated for a reason.
You cannot separate money and the sovereign government of a nation, unless your plan is to stop the nation being governed other than by The Lords of Finance.
Neil,
Re your dislike of professional economists having a say in economic decisions, who would you want operating on you should you need surgery? A construction site laborer?
Personally I'd prefer a fully qualified surgeon.
Let's sack Bernanke and replace him with a mentally retarded illiterate: should save a few dollars.
Ralph,
We can let a bunch of economists set interest rate policy, because it has limited impact on the economy, at least relative to fiscal policy.
Additionally, rates have to be set by a small group. If it was set by the House of Commons, bond holders and real estate agents would become huge permanent lobby groups on those decisions. The votes, which are public, would cause market chaos while they were underway. It would also be impossible to make emergency rate decisions when the House was out of session.
Why set the rates at all... does more harm than good. Mosler approach is the correct one (0% always, all the time, just issue short-term bonds).
The way we 'democratise' money creation is getting rid of central banks and Treasury departments getting full control of the currency and get done with this faux 'CB independence' thing. After all CB's are subservants of both treasuries and private banks.
Comparing economists to surgeons is laughable, specially when it comes to macro. Because, of which subset of economists are we talking about? All the ones that believe in fantasy money multiplier models? There is no 'technique' behind macro-economy because it's not a science, it cannot be 'engineered' in the way surgery or construction can be 'engineered' (or any other job).
So in reality, economists are not much better equipped than politicians to deal with an human-made system (the money-credit system) which is not ruled by physical laws, but by humans. So their job is to inform elected people of their options and build technical implementations of plans, but not make unilateral decisions about 'setting rates', 'launching QE schemes' or whatever pseudo-science backed crap they come with.
They are "not even wrong", as Pauli would have said.
"who would you want operating on you should you need surgery?
Somebody who isn't a homeopath, or a witch doctor, or a surgeon who still believes in 19th century practices.
You make the usual mistake of constructing a straw man argument and believing that these people have any more clue of what they are doing than the rest of us.
They don't.
"Additionally, rates have to be set by a small group."
They can be set by the Chancellor like they always used to be - on advice from whoever they choose and if necessary subject to a recall vote in the House.
Or you just park them at zero and forget about them as a the waste of time that they are.
Ralph, WM has reported that in his experience bank regulators are indeed useless because they are not trained properly and could be made useless if the people in charge understood the system and provided regulation and capable regulators based on it.
Worse, the US the chief regulator had decided that regulation was useless and did not provide oversight. The result was the criminogenic environment in banking that greatly contributed to the magnitude of the crisis.
The way that the law is written the Fed board is supposed to be broadly based including labor. If that had actually been the case, it would not be been just the bank that were bailed out with mortgage holders left to drown by the millions by being shoved underwater.
“You make the usual mistake of constructing a straw man argument and believing that these people have any more clue of what they are doing than the rest of us.”
Well professional economists are far from perfect, as they themselves are the first to admit, but if you really think they know no more about economics than a random selection of people off the street then you’ve lost the plot. Moreover, I’d guess about 99% of voters want to see professional economists having a significant say in how much stimulus the economy gets.
Anyway, best of luck with your campaign to have economists barred from having any say in running the economy.
But, of course, democracy doesn't work if the law is not followed, e.g., the Fed mandate and The Full Employment and Balanced Growth Act aka the Humphrey–Hawkins Full Employment Act.
"Moreover, I’d guess about 99% of voters want to see professional economists having a significant say in how much stimulus the economy gets."
That's definitely an economic prediction.
And has about as much chance of being right as all the others.
Economists advice - alongside all the other lobbyists with an axe to grind. Politicians are there to decide - because we can at least vote them out.
Beowolf's proposal to index the FICA rate to the unemployment rate would appear to serve the same purpose as helicopter money. It could be done either by a mathematical formula, or at the discretion of the Fed, or at the discretion of the Treasury, all subject to Congressional oversight and regulation.
The basic principle of indexing government programs to economic data is already established, i.e., some programs are indexed to CPI. No one has claimed that indexing benefits to CPI is the end of democracy.
One can imagine variations on the Beowolf proposal, like scrapping FICA all together and indexing income tax rates instead.
I for one have no confidence in Congress to manage the economy. They tend to do "too little, too late."
Exactly, economists cannot have unilateral power to make choices in behave of democratic nations. Is non-sense, we may as well call this system aristocracies. They can have a role as advisor and staff of politicians (and they already do), but they shouldn't manage institutions with unilateral decision and action power.
Economists have a saying, usually oversized to the saying they should have, why not actual real engineers? Western economies were much better run when the technical staffs of politicians were more populated by actual engineers and science-types (physicists) than economists, lawyers, lobbyist and business-types that are clueless about how systems in the real world function. But I digress, they form part of politician cabinets where they can advise and already have enough power, they don't need more
Dan, that's fair enough, we can engineer automated systems (I'm favour of that, and have expressed in this blog several times, as humans are in general to biases to manage HUMAN systems) that are then approved by politicians and we can maintain those automated systems as long as we want (then we can vote other politicians that will remove them).
This is not the same that giving some clueless economists in a central bank more power than it's good for them to have.
There are no humans running automated systems, with humans out of the equation you can easily get rid of them. Now, we can't say the same about prostitute institutions like the CB's...
Ignacio,
There’s a problem with your claim that “economists cannot have unilateral power to make choices in behave of democratic nations..” The problem is that they ALREADY DO HAVE that power (rightly or wrongly). I.e. at the moment, the Fed, the Bank of England and doubtless some other central banks can override stimulus decisions taken politicians (not that politicians take such stimulus decisions in any very organised manner: i.e. Congress and the British House of Commons are chaos, to put it politely).
In fact market monetarists have a name for that “power to override”: they call it Monetary Offset.
What’s odd about the objections raised by Neil Wilson, Ann Pettifor and others is that they never seem to object to the EXISTING power to override. But as soon as Wren-Lewis, Positive Money etc suggest a slightly different method of implementing stimulus which also involves the power to override, all Hell breaks loose.
I should have said "they shouldn't", I don't agree with the status quo (and I would favour a 'Chicago plan'/full reserve style of banking too, but that's a parallel discussion).
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