Like I ranted yesterday, GDP is a very poor way of measuring how certain things are getting better. And my absolutely favourite example is how the Internet has revolutionized the ability to interact with and eavesdrop upon thinkers and teachers – whom one would previously have had to ambush in some University corridor.
An example has arrived on this blog: Canadian Professor Nick Rowe of Worthwhile Canadian Initiative (an injoke for Canadians) clarifying some thoughts on this blog about where Fiscal Policy becomes Monetary Policy. In so doing, he links to a post of his from last year where the issues are first presented and then discussed in (what is for me) bewildering detail. Some but not all of the insights can be boiled down to this comment: ‘So if there’s no danger of inflation, on the margin, go ahead and print!’.
The question, however, is what you call that. Vimothy – another clearly very learned fellow – has been getting stuck in on this question, writing this interesting paragraph:
A helicopter drop would be a fiscal operation with no offsetting bond issuance. It would place downward pressure on the CB’s target rate (which is why, in the MMT narrative, fiscal policy is accompanied by bond issuance–its an “interest rate maintenance account” in MMT jargon), but it would ensure that everyone is disabused of the notion that government borrowing funds its spending, and it would deny the bond market its corporate welfare
All of this interests me deeply, because I am meant to occupy that vital slice between monetary experts like Nick and vimothy, and the political class that needs to choose and also sell the right policies to their suspicious electorates. My basic intuition is: if we are deeply below our Aggregate Supply curve, boosting aggregate demand is the answer – but how can we do this? I.e. this is where I think we are – the dotted line:
(whereas supply side miserabilists like John Redwood think we are always at the vertical bit of the supply curve). I tried in ‘Credit Where It’s Due’, with my suggestions for things like the purchase of Covered Bonds (making mortgage lending cheaper); a National Infrastructure Bank; or even the straight purchase of banking equity (which could be just handed out to the public – that last idea is the closest I come to helicopter money). But on this question of whether printing money and leaving it out there in the real economy is Fiscal or Monetary policy, I fudged the issue, with ‘quasi-fiscal’ or (borrowed from Nick) ‘fiscal dominance’.
So. Getting to the point. First question: If you print money, and spray it out of a helicopter (without asking for it back later) what do you doing? If the ‘spraying’ is just enabling the government to do the same things while issuing fewer bonds (bonds being: things you have to pay back, money being: stuff they don’t need to pay back), then it seems like monetary policy. The shape of the government’s liabilities has changed, and future expectations of the money supply and NGDP have surely changed.
But this ignores the insight of note 11 of this IMF document: that this is a transfer to the public. Those people standing under the helicopters see their asset position improve, surely? If they are debtors, the extent to which their future indebtedness is going to weigh on demand is surely lessened. ‘Hey Mom! I found a thousand pounds under the hedge! We can go on holiday after all!’, and so on. If you are convinced by Richard Koo’s analysis of Japan, then such balance sheet effects are surely critical. Whereas the monetarist interest on changing people’s expectations of future economic demand can seem rather secondary if you have ASSETS/LIABILITIES of <1 …
Which leads to the second question. Suppose we agreed we were in the situation above. We agree with Nick (and Scott Sumner, and others), that this is absurd – we have a money printing press, surely that thing can boost aggregate demand somehow? But how do you sell that idea to the public? ‘We’ll spray money out of helicopters’ annoys those who don’t really need the money. It also lessens discipline, to put it mildly: we have a political class that collectively dodges questions of spending cuts – and yet here I am, saying ‘Print money, spend it’ – a classic invitation to avoid thinking about hard things.
I am genuinely very interested in your answers.