"Central bank independence" is voluntary restraint on currency issuance by the currency issuer through the constitutional process of representative democracy that vests the purse strings and money creation in the people's elected representatives, allowing the holders of the purse strings to delegate at least some of its power to unelected technocrats. While this may be instituted democratically, and result is anti-democratic in transferring control at least partially to interested parties and special interests.
So the question is not whether helicopter money can be democratic but whether the democratic process can be restored politically by ending the delegation of democratic control over currency issuance. Governments create the institutions under which they operate and they can therefore change them by reversing the process.
The question of "democratic helicopter money" is easily resolved by transferring currency issuance to the Treasury and folding the payments system into the Treasury. If the people's representatives wish to continue interest rate setting they can do that through a Treasury agency also, under the direction of the executive or the legislative branches.
The present system of a politically independent central bank is anti-democratic and should be terminated as operationally unnecessary as a separate entity.
The people's representatives should appropriate funds as they see fit and the agency they designate should then make the necessary payments, issuing the funding as needed. The primary role of taxation then becomes withdrawing funding as needed to control inflation by keeping effective demand consonant with the capacity of the economy to meet it using functional finance.
The issue really boils down to ending the concept of "sound money" as a relic of the now non-existent gold standard. It's archaic at best, and it was even mostly wrong under a gold standard although there was less policy space under a fixed rate system than now under the present floating rate system.
Let's face it. The financial crisis was a debacle for capitalism and still is. The system essentially collapsed and was only rescued by government action. The problem was and continues to be that government saved the capitalists and let the rest of the people largely fend for themselves. Many drowned and some are still underwater. The system has not recovered and worker's real wages are at levels they were at in the Seventies.
So those who are tempted to object to the "radical" suggestions above need to explain just how the existing institutions served the people whom they are represented as serving in a democracy where interests are not supposed to considered special.
Why were special interests served and not the interests of all. The answer of those serving the special interests is that the interests were special because these interest underpin the system. So it was necessary to use the many as a tool to serve the interests of a few so that the interests of the many would be served "in the long run"? I have a bridge to sell anyone that falls for that line.
The policy space was available and so was knowledge of how to use it. The reality is that that officers of the ship bolted for the life boats and left the women and children behind.
Let's face it. The financial crisis was a debacle for capitalism and still is. The system essentially collapsed and was only rescued by government action. The problem was and continues to be that government saved the capitalists and let the rest of the people largely fend for themselves. Many drowned and some are still underwater. The system has not recovered and worker's real wages are at levels they were at in the Seventies.
So those who are tempted to object to the "radical" suggestions above need to explain just how the existing institutions served the people whom they are represented as serving in a democracy where interests are not supposed to considered special.
Why were special interests served and not the interests of all. The answer of those serving the special interests is that the interests were special because these interest underpin the system. So it was necessary to use the many as a tool to serve the interests of a few so that the interests of the many would be served "in the long run"? I have a bridge to sell anyone that falls for that line.
The policy space was available and so was knowledge of how to use it. The reality is that that officers of the ship bolted for the life boats and left the women and children behind.
Mainly Macro
Simon Wren-Lewis | Professor of Economics, Oxford University
28 comments:
Norman nailed it!
There is nothing wrong with current set up that prevents governments to use the right policy. This is almost like "the fed is a private bank" cranks talk. MMT is not saying that floating rate currency system needs to be changed from central bank based to treasury based system but MMT is saying It already is treasury based like you Tom wrote so beautifully yourself a few years back. :) I am not saying there is something wrong with making a law that no one doubts this but most likely there is going to be a lot of opposition to the idea from the likes of Peter Schiff and Bob Roddis, a lot of empty talk and pointless arguing. And that itself is not solving the issue, gonernment still needs to deficit spend. I don't think too many people believe that America is running out of dollars, at least they understand within minutes that It is not when you explain.
It's simply economics, which is about increasing efficiency through eliminating waste. Institutions that are an economic cost (and also a political drag) like the Fed should be abolished.
Conservatives above all should be behind this since they want to shrink the size of government by eliminating "waste, fraud and abuse>. As an operationally unnecessary institution, it is a waste of resources.
Conservatives, of course, like theft that the Fed is "politically independent," allowing the revolving door to to run it for special interests. The answer to that is that a small group of technocrats making decisions about interest rates instead of the market is a command system that is both anti-capitalistic and anti-democratic.
Both left and right should be calling for the abolishing of the Fed on those grounds, both eliminating waste to increase efficiency, and also to end a system that circumvents markets and is not subject to public control through the electoral process.
A big reason that governments don't deficit spend when it is needed at present is that legislators can push the responsibility for economic policy from fiscal policy where it belongs to monetary policy that is inefficient and ineffective.
No legislator want to be forced to take a tough vote and appropriations are often tough votes since they are targeted. They would rather put it off to unelected and unaccountable bureaucrats who simply change interest rates that "affect everyone," even though, of course, there are still winners and losers.
When monetary policy is used to address "inflation,
meaning rising wages that "create expectations" of price increases, then the central bank uses monetary policy to increase slow investment, increase unemployment, and weaken labor bargaining power. This uses not only interest rate setting as a tool but also the supply of workers by increasing the pool of involuntary unemployed.
This is carefully concealed by conventional economics so that most people don't understand how institutional arrangements are being used to fool the rubes.
And this is even before getting into bond issuance, which is also operationally unnecessary under the existing system and constitutes a subsidy for bond holders. Subsidies are inefficient and favor particular interests.
Bond issuance can only be justified in terms of serving public purpose. What public purpose does making bond issuance mandatory legally when it is operationally unnecessary serve? How does this advance the general welfare?
Proponents of monetary policy will say that bond issuance is needed for the central bank to conduct monetary policy using OMO. Well, why not just set the rate to zero or pay IOR?
Another objection is that central banks were established to ensure liquidity as lenders of last resort. If Warren Mosler's proposal is adopted, then the unlimited liquidity is automatically provided to solvent banks and that can be done though Treasury just as well.
Why create two sets of books when the accounting distinction is meaningless. It's like husband and wife having separate accounts instead of a joint account.
I agree that this is probably not going to happen anytime soon, but if we are going to discuss "democratic helicopter money" then it should be brought up as making more sense. Let's just cut to the chase.
Opps. Spelling corrector caught me.
"theft" in "Conservatives, of course, like theft that the Fed is "politically independent," allowing the revolving door to to run it for special interests" should be "the fact that"
It's pretty clear from the discussions amongst the illuminati in the UK that they are trying to do a power grab, where they get to be the new Robber Barons - dictating to elected government in the way that the ECB, etc are dictating to Greece.
It's quite a scary time for democracy that is based upon the sovereignty of the Commons over all others.
There is no justification for rule by experts any more that there is justification for rule by monarchy.
Given that MMTers tend to favor simply creating fiat and spending it in a recession (and/or cutting taxes), MMTers ought to pay more attention to the democratic helicopter money idea, because the latter is a PARTICULAR WAY of implementing the above “fiat” idea, and indeed the best way I think. That is, under a democratic heli system, the split of responsibilities as between central bank and democratically elected politicians remains much as it its now, and few people object to that split of responsibilities (apart from Neil Wilson).
That is under both the existing system and under a democratic heli system, decisions on STIMULUS are taken by the central bank (or some other committee of economists), while POLITICAL decisions like what proportion of GDP to devote to public spending, and how the latter is split between education, law enforcement, infrastructure, etc etc is left with politicians.
"No legislator want to be forced to take a tough vote and appropriations are often tough votes since they are targeted. They would rather put it off to unelected and unaccountable bureaucrats who simply change interest rates that "affect everyone," even though, of course, there are still winners and losers."
They vote all the time on things...
Tom they are all Darwinists who think you can just tweak the environmental factors and somehow magically an economy will "evolve" out of nothing...
Like some sort of "mutation" will occur... and "survival of the fittest" is the 'natural order' that mankind shouldnt be messing around with....
You even point out here: "there are winners and losers..." YES! thats the whole point Tom.. the winners are "the fittest"...
This is just evolution in action... any Darwinist should never complain about what is transpiring... there is no "justice" in evolution...
rsp,
" That is, under a democratic heli system, the split of responsibilities as between central bank and democratically elected politicians remains much as it its now"
There is a world of difference between setting a price and setting quantity - as we saw with the Monetarist disaster of the 1980s and see with the ECB disaster in the Eurozone with Greece.
You'll find a great many people object to an unelected House of Lords.
Neil,
Heli money does not work just via "setting quantity". When the state creates money and spends it (and or raises people's after tax income by cutting taxes) there is a FISCAL effect AS WELL.
Indeed therein lies one of the beauties of the MMT "create fiat and spend it" policy or the democratic heli money policy. That is there is much disagreement amongst economists as to which is the more effective, fiscal or monetary policy. With democratic heli money, it doesn't matter which of the two does the bulk of the work.
Re your reference to the House of Lords, that's COMPLETELY IRRELEVANT. As I've told you about 50 times, under a democratic heli regime, it's true that the central bank can overrule democratically elected politicians when it comes to stimulus, but that's not one iota different to the EXISTING SYSTEM. So can you stop suggesting there is anything MORE undemocratic about a democratic heli system than there is about the existing system?
Why are you the only person on planet Earth that doesn't get that point?
Moreover, we COULD have a democratic heli system under which politicians had full control, and central banks had none. Problem there is that almost the entire world (Neil Wilson apart) is not keen on giving politicians full control of the printing press.
And of course if Ralph is suggesting that the new MPC works *exactly* as it does now, then the Treasury will always prevail if it wants to spend more than the MPC has 'permitted' under its toy powers.
cf Bank of England Act 1998 s19.
"The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.
(2)An order under this section may include such consequential modifications of the provisions of this Part relating to the Monetary Policy Committee as the Treasury think fit."
So like the rest of the Sovereign Money idea it is little more than a pointless political illusion.
Parliament is sovereign and nobody can tell it what it can and can't do.
"Problem there is that almost the entire world (Neil Wilson apart) is not keen on giving politicians full control of the printing press."
And yet they always do as the current legislation, to which you are referring and clearly don't understand, explains in detail.
The key point is this. Do you or do you not believe that a set of unelected individuals should be able to overrule a parliamentary approved "people's budget" - as the House of Lords tried to do in 1910.
If you don't then why not spend the money on street theatre because it is far better and entertaining use of public money than paying fat cats to sit around a table and pretend to make decisions that are binding on nobody.
More confused garbage all based off of the strange belief that one type of Govt IOU is "debt" and thus bad and another type of Govt IOU is "money" and thus not bad.
Once you acknowledge that the mix of different Govt IOUs outstanding is largely irrelevant, you understand just how stupid all of these mainstream debates are. Its the quantity of outstanding GOvt IOUs flowing into the non-Govt every year that, along with private sector net IOU creation, determines incomes and demand. Whether these Govt IOUs are in reserve accounts or securities accounts has been proven definitively by QE to be largely irrelevant to anything wrt GDP and the macro-economy
Ralph, the problem with splitting appropriations between the elected body that holds the purse constitutionally and a technocratic body that is appointed is that the technocrats are supposed to act as a brake on the otherwise profligate politicians whose instinct is supposedly to buy votes.
So the cb is supposed to act counter to the legislative body. Now many view monetary policy as the check to fiscal policy and that thinking would carry over to anything that the cb and legislators share.
The whole idea is that unaccountable experts are needed to check the power of the people, who in a democracy might decide at any time to raid the treasury through political pressure on their elected representatives, or, even worse, electing populists. t's the basis of conservatism and republicanism too.
Matt, in the run up of UE after the crisis Congress would only pass a one meager stimulus package and even then the politicians in the WH cut it to the bone to get through. After that, the problem was left to the Fed even though BB strongly suggested that the issue was at least in part fiscal.
Problem there is that almost the entire world (Neil Wilson apart) is not keen on giving politicians full control of the printing press.
Right, and that is at the foundation of oligarchic "democracy" through elite control of how capital is allocated through the private sector financial system, and how government spends.
The whole program is to obstacles in the way of a populist political party taking control of the power of the purse through elections and if that should ever happen by erecting institutional obstacles like central banking controlled by technocrats.
But under the constitutional rules they cannot ever ensure that a populist takeover is impossible, which gives hope. However, in liberal countries, some parties are illegal, so even the type of populism is limited.
If BB had been completely honest in his testimony he would have informed Congress that all the cb can do is manage liquidity. It cannot change the amount of non-government net financial assets. When the issue is spending, then the fiscal authority must act.
One option would be for the fiscal authority, here the US Congress with presidential approval, to delegate some fiscal responsibility to the cb. This would be the means for undertaking a "democratic helicopter drop," and then Congress would have to face up to the real issue where the rubber hits the road,
But BB continued to convey the impression that the cb still had power to deal with the situation when it was clear that it did not. So much for trusting technocrats to act in the common interest.
BB was protecting the cb by failing to reveal the truth abut its impotence in this regard. And if he did not know the truth, he doesn't qualify as an expert in the first place.
And it's actually worse than that. QE was reducing non-government $NFA by transferring the interest that would have been paid to bondholders to the Treasury when the amount needed to be increased. Sure, Treasury returned it through deficit spending, but it didn't need the interests payments to do this. Those billions could have been left in the economy with the result that the deficit would have been somewhat larger. But that's what was needed at the time.
Did BB not know this?
Tom-
The way you have summarized the situation wrt TPTB's narrative about the need to reign in politicians' desires to give "free stuff" away to voters is excellent, and I think exactly right. And therein lies the real opposition to MMT paradigm awareness among the public. A combination of Kalecki's take on the political aspects of full employment and Galbraith's take on the inherent bias against deficits by the finance community from "In Defensee of Deficits":
http://www.thenation.com/article/defense-deficits#
"Bankers don't like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over--a house or factory or company--that will then become the property of the bank. It's easy to see why bankers love private credit but hate public deficits."
These are the real operative reasons why the elite have created and spread the mainstream neo-liberal myths about Govt finance, of which myth of runaway spending by politicos buying votes is but one myth to go along w IGBC nonsense, riciardian equivalence nonsense, bond vigilantes nonsense, deficits are inflationary nonsense and all the rest.
Which leads me to my thoughts on "fiscal action" taken by central banks or so-called "democratic helicopter money".
What would this look like? Would the CB literally send out checks? Because if the TSY send out the checks it would not be a CB action. QE doesnt count, although one could make the argument that buying worthless MBS paper is fiscal action by CBs. CBs couldnt increase UE spending, they couldnt cut taxes, so what the hell does democratic helicopter money even look like?
Maybe the Fed could buy stocks like the BOJ, that would make the financial folks happy. That would be the only democratic helicopter money I could see the mainstream neo-liberal crowd getting behind.
Right, the whole neoclassical economic edifice is to fool the rubes into thinking that getting ripped off is "natural," and government is out to get you.
It's really pretty transparent in the results.
We continue to be trapped by the narrative of bankers. We could keep discussing about the merits of 'democratic helicopter money' or the semantic traps of 'debts' and IOU.
But truth is that right now we have oligarchic helicopter money where the whole finance (and arguably FIRE) sectore is being heavily subsizided when they need though unelected distribution of heli-money. That is asset swaps to sustain market-to-fantasy balance sheets and keep otherwise impossible spreads and lending rates.
So why do we keep discussing on bankers framed terms about the merits of any other practical policy. Are we supposing that the current frame/system is better than almost any other at all? The whole things sounds like a scamming of the population to me by framing language and semantics.
To elaborate on this, if Bill Black and Randy Wary are correct that the TBTFs were in fact insolvent on accounting standards used by regulators but concealed by TPTB as merely a liquidity issue, then a huge amount of helicopter money was advanced and rolled over in the course of a de facto bailout that greatly exceeded the de jure bailout appropriated by the fiscal authority.
This was happening at the same time that insolvent homeowners were being foreclosed on by the very institutions that were being propped up extra-legally.
Then there is the issue of funding directed at alleviating the plight of homeowners that was never distributed.
Monumental scam.
"Right, the whole neoclassical economic edifice is to fool the rubes into thinking that getting ripped off is "natural," and government is out to get you.
It's really pretty transparent in the results."
My best guess is, It is set up this way to cover a big lie, that is capitalism itself. Once you start exercising MMT thoughts you'll realize that this thing capitalism cannot be morally justified. If you are a politician right now, you can go to the poor and tell them that ok, I'm gonna get some of that wealth from those who are more capable of generating wealth and give some of that to you. They'll be happy when you do that. Once they realize what is going on, the'll say: you are the reason we are poor and so you are not going to be gloryfied for this. This is exactly why MMT wins every battle and loses the war. What do you think, we are a club of geniuses here?
Straightforward helicopter money is easier for people to understand than the whole government bond square dance.
Also, issuing interest-bearing bonds is basically a way of giving free money to the capital class. Of course, if the central bank keeps rates near zero, it won't matter. But they won't do this forever. Big capital wants its old yummy interest rates back, and sooner or later the central bank will give them to them.
A government can only inject so much net currency into the economy while running a sensible monetary policy at the same time. Every dollar that is injected in the form of some rich guys coupon payments is a dollar that is not injected into a poor guys pocket.
Dan-
I will ask my question again...
"What does democratic helicopter money look like"
I bet the Fed's computer systems dont even have the capability of mailing out hundreds of millions of checks (or at least direct deposited some large portion of them) if the plan is to have the Fed make payments to every citizen. Please describer to me what the process of democratic helicopter money would look like.
Dan-
There is no such thing as non-interest bearing electronic Govt IOUs currently with a IOR policy in place. SO the distinction between Govt "debt" as interest bearing and Govt "money" as non-interest bearing gets thrown out the window. But for some reason, people continue to overlook this little corner of reality.
Auburn, you don't need the Fed to issue helicopter money. The Fed's authorization to issue money comes by virtue of Congressional delegation of the monetary authority that is constitutionally assigned to the Congress itself. Congress retains the power to authorize anyone else it wishes - for example, the US treasury - to issue US government money. With an act of Congress, the issuance of helicopter money could in principle become an normal part of the fiscal process, with zero Fed involvement (and without the need for bizarre workarounds, like platinum coin issuance.
Also, interest on reserves has only been in existence since 2008. It is not a necessary part of monetary policy, but only a recent innovation. There are ways of issuing money that don't require paying interest to large financial institutions in the process.
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