Helicopter Drops: How much should we drop?

Now that Ryan Avent is talking about using payroll tax cuts as a proxy for a helicopter drop, we need to address the question of “how much?”

Here is Ryan talking about integrating fiscal and monetary policy:

” The Fed could then use the payroll tax rate as an additional policy tool when interest rates fell to near zero. Or it could use the payroll tax rate as its primary policy measure, in place of the fed funds rate. To provide expansionary impetus to the economy when expectations for nominal output dipped below the desired level, the Fed would reduce the payroll tax rate, making it more attractive to hire and giving workers an immediate and direct lift to their paycheques. And when expectations began to run too hot, the Fed could raise the payroll tax rate, reining in spending.”

That’s a great idea – it could be worthwhile to more closely combine the workings of the treasury and fed, and we should think about how this might happen, and the consequences of those actions. JKH has gone into detail on this topic and how to approach thinking through the deep accounting links of the treasury and central bank.  I consider this approach to be one of the core ideas of Monetary Realism.

But back to the RA’s implied question: How much should the fed change the tax rate, given changes in unemployment and inflation? It turns out there is some thinking on this from the MR crew.

One approach is my Strong Economy Rule, which relates unemployment, inflation, and population growth to give a target government deficit:

1.8(Uc – Ut) + (It – Ic) + Pop = % (Gt)

1.8 (Current Unemployment – Unemployment Target) + (Inflation target – Current inflation) + Population Growth = Target % Government Deficit

This is really combining Okun’s law with an inflation pressure value, and then adding in population growth so we are not stuck with a zero real growth economy.

Another possibility is beowulfs proposal on a  link between payroll taxes and the unemployment rate, to be adjusted quarterly.

The quarterly adjustment was part of Peter Orzag’s proposal on using payroll taxes as a macroeconomic stabilization tool, which he goes into detail in this paper.

There are lots of good reasons to favor “helicopter drop”* style fiscal policy over monetary policy. Mostly, monetary policy ends up working through real estate. Real estate has huge problems as a macroeconomic stabilization tool.  It ends up forcing us into a real estate monetary standard, which of course would have problems. Of course, fiscal policy has problems too, but helicopter drops seem to avoid most of the biggest problems with using fiscal policy.

*Ramanan hates the term helicopter drop, and justifiably so. Using it implies you don’t know much about how money is created. Still, it’s a beautiful image.

 

 

 

 

 

 

 

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JKH
3 years 9 months ago

“Still, its a beautiful image”

Should have read your post before I just said elsewhere its a silly metaphor.

Nevertheless, a cartoon Bernanke at the controls of the copter is quite good.

That image works best with banknotes and a madman.

Could be the recent dilution of that pure distribution concept that has me mumbling.

🙂

Guest
3 years 9 months ago

Personally if the helicopter drop consists of cutting payroll tax (or sales tax or any regressive tax that taxes economic activity rather than property) then I think it should be permanently a 100% cut even if unemployment is less than 2%. What we need is for technology and efficiency to be pushed all the time. For all human ingenuity to be given an outlet all the time. We need to be pushing technology so that unpopular drudge work is less needed. We need to be developing renewable energy systems before fossil fuels run out. We need to be working out how to use seaweed before soil erosion and lack of fresh water is an issue. That will only happen if there is not mass involuntary unemployment that acts as a buffer whenever supply of natural resources becomes an issue. Inflation needs to be moderated not by unemployment and economic exclusion but by an asset tax. Just my opinion.

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Cowpoke
3 years 9 months ago

12.5% for 2 years Minimum.
Let me keep my initial and then give me a tax credit for my employeers 6.25 percent.
That’s a start.. OH, and get rid of the Gas and Sin Taxes and I will call it a better start.

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