A recent article on VOX has prompted more commentary on Helicopter
Money.
In principle, HM
should appeal to anyone who believes that more stimulus is needed. To those of a post-Keynesian mindset, HM is
just expansionary fiscal policy; the fact that it is financed by money rather
than bonds being of secondary importance.
But those that believe fiscal policy is impotent and it all comes down
to monetary policy can view HM as being another monetary tool.
Given that it should appeal to both points of view, it's perhaps
odd that it should cause so much argument.
Yet, as someone whose perspective tends to fall in the former camp, I
find myself strangely irritated by the approach of many in the latter. Where additional stimulus is needed, I think
debt-financed fiscal expansion is best, but I'd still see HM as a pretty good
substitute. So what's the problem?
I think the issue is that portraying HM as monetary policy
looks to me like a pretence and worse, it looks like a rather desperate attempt
to defend the idea that monetary policy is sufficient to regulate demand in the
economy, regardless of what fiscal policy is doing. In my opinion, if we think we need HM, that is an indication that we
have got fiscal policy wrong. Furthermore,
it is an indication that when we get fiscal policy wrong, regular monetary
policy is not capable of providing anything other than a temporary fix. Monetary policy enthusiasts like to think of the
zero lower bound as a special case where regular monetary policy might be
insufficient. However, they fail to
acknowledge that if the fiscal stance is misjudged, attempts by monetary policy
to compensate will inevitably end up at the zero lower bound anyway (see here).
So what I don't like about this debate is the way that it is
used to avoid recognising how important fiscal policy is. Fiscal policy is, on the whole, an unwieldy
tool for day-to-day management, but it is critical that it is used with a view to
its impact on demand, not to managing the public debt. If this is not the case, monetary policy is
stuffed. It might provide a temporary
fix, but only through stoking private sector debt bubbles. The notion that HM may now be beneficial
should be a recognition of this, not an attempt to pretend that monetary
policy is still what it's all about.
Nick,
ReplyDelete"Sound" fiscal policy?
In literature "sound finance" is an euphemism for contractionary fiscal policy, so you might want to use a different word.
I guess, but maybe that's the point. If "sound" is being used to suggest policy that can only be contractionary and not both ways then it's being used wrongly.
DeleteAs I argued in my last article, the reason why some of us object to HM is that the central bank is increasing its power at the expense of parliament. Even if the policy is called for economically, democratic principles trump expedience.
ReplyDeleteIf fiscal expansion is really needed, let the legislature do it.
I presume that the power to enact helicopter money would have to be granted to the central bank by parliament anyway. Does that make it so different from the legislature deciding?
DeleteIt creates a largely unaccountable entity with the power over government purse strings, which it can use however it sees fit. It is unlikely that an elected givernment would be able to roll back this power once it has been granted.
DeleteI suppose it depends what you think characterises HM. To me the only thing that distinguishes it from a lump sum fiscal transfer is what happens on the debt issuance side. Both would operationally take the form of monetary payment to the private sector; the fiscal transfer would have to be accompanied by a sale of Treasuries to neutralise the impact on reserves, whereas HM would miss out that step.
DeleteBut of course, there are other issues here, like how the amount, timing and distribution are decided and on the whole, current HM proposals do involve delegation of that power by parliament to a body that can act on a more timely basis. And I'd agree that this is a legitimate area of concern. I would say however, that the reason this might be necessary is that current arrangements for fiscal policy make it less wieldy as a demand management tool (precisely because fiscal policy is not currently seen as a demand management tool). If we wanted to have the ability to make timely fiscal transfers to address demand shortfalls, we would likely want the same delegation of powers as are mooted for HM.
> Nick , have you seen this analysis on this blog here - http://monetaryrealism.com/helicopter-recall-fiscal-repairs-needed/
ReplyDeleteYes, I did see that - thanks
Delete