Brad DeLong has an interesting rule of thumb: Paul Krugman is always right. And if you ever think he’s wrong … Don’t....
I use a different rule of thumb to Brad: Keynes and Friedman are always right.sample of one
A growing number of economists are advocating granting central banks the power to make payments to households. Most recently, Mark Blyth, Simon Wren-Lewis and I argue in The Guardian that the Bank of England should be given this power – not with a view to using it now, but as a contingency. Currently, contingency planning amounts to keeping our fingers crossed and hoping there is no negative shock to demand – that is irresponsible. Further QE, negative interest rates, and attempts to raise the inflation target are all terrible policy options – probably ineffective, and potentially self-defeating. Making payments to the household sector, by contrast, is in many ways preferable to conventional monetary policy.
Encouragingly, the predominant objection to this proposal is rarely about efficacy. The main area of concern is the potential impact on the Bank of England’s balance sheet – and, by the implication, on future control of inflation. This subject can be made very complex and confused. But the crux of the matter is straightforward, and the balance sheet issues that arise are not unique to our proposal.Lonergan goes on to point out the problem is a pseudo-problem in that it arises from accounting conventions and can be addressed by the same. It is the government's bank, and the government makes the rules.
We propose that the government legislates to empower the Bank with the ability to make payments directly to the household sectorThe Guardian
The author provides a rigorous analysis of Milton Friedman's parable of the 'helicopter' drop of money – a permanent/irreversible increase in the nominal stock of fiat base money rate which respects the intertemporal budget constraint of the consolidated Central Bank and Treasury – the State. Examples are a temporary fiscal stimulus funded permanently through an increase in the stock of base money and permanent QE – an irreversible, monetized open market purchase by the Central Bank of non-monetary sovereign – debt. Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, 'lowflation' and secular stagnation are therefore unnecessary. They are policy choices.
More generally, I find the idea expressed by Friedman – that the economy will tend toward a stable, long term equilibrium, perhaps oscillating in the short term – is often used by economists, but is rarely fully justified. It is merely assumed that the economy will behave this way, and any erratic behaviour – such as money illusion, and sticky wages/prices – can be dismissed as short term ‘noise’. However, seems to me that such an idea can only be sustained by sweeping potential problems under the rug. Indeed, this supposed ‘noise’ (a) could be more relevant to understanding the system than the equilibrium and (b) could have a permanent impact on the economy and therefore equilibrium itself.Unlearning Economics
The radical idea of depriving banks of their money-creating function, like the idea of helicopter money, was first proposed by conservative Chicago economists – Henry Simons and Irving Fisher – in 1936. A distinguished conservative pedigree will not make the loss of seignorage rights acceptable to bank lobbyists any more than it makes helicopter money acceptable to conventional central bankers. But if global economic stagnation continues, public patience with conventional responses will run out – and ideas that now seem revolutionary may become conventional wisdom.Reuters
Printing money might not be dignified, but it does work – just keep the banks and the credit rating agencies out of it
It works like this. You get De La Rue to print £14bn of banknotes, roughly the amount extracted from high-street spending in extra VAT this year. You send a fleet of vans to transfer the money to Northolt and other regional airports. You load it into squadrons of RAF helicopters and, in full view of television cameras, scatter it over shopping streets the length and breadth of the land. The notes are designed to disintegrate within six months and can be banked only by registered firms. Those finding them must spend them fast on goods and services.
"Helicopter money", once a satirical monetarist metaphor, suffers only one serious objection as a cure for a nation suffering from collapsed demand. It is vulgar and undignified. It seems tacky, populist, messy, a smart-alec suggestion not fit for consideration by ministers, bankers or economists.
Let's look at what Bernanke really said and what he really meant: "A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money."
Yes, it was Milton Friedman who "invented" the helicopter drop of money analogy, but Friedman's invention was actually based on John Maynard Keynes theory of the Liquidity Trap.
A Liquidity Trap occurs in a low-interest rate environment with stagnant economic conditions and high savings. During this environment monetary policy becomes ineffective. Why?
Because under these conditions people believe that they will not receive an adequate return for the risk assumed in owning other financial assets, even bonds, so they prefer to keep cash in short-term bank accounts. In other words, they hoard cash. Sound familiar?
The most frequently misunderstood aspect of the "helicopter drop of money" analogy (from Keynes to Friedman to Bernanke) is that it refers to actions on the part of a central bank, but this is not true.
Bernanke used the phrase in his speech in a section explicitly discussing Fiscal Policy: "Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money."Five Things You Need to Know: Deflation... And the Headstones Climbed Up the Hills
