Helicopters Drops and the Monefiscalist Synthesis

Cullen wrote a post agreeing with David Beckworth‘s proposed response to Cardiff Garcia’s challenge. Cardiff posed a challenge to the econobloggers who think there is an aggregate demand problem: What should we do?

Beckworth says:

“Here is how I would operationalize this policy. First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.”

This is a great idea. My suggestion is we payroll tax cuts to provide this helicopter drop. For one thing, altering the payroll tax rate is easy to do from an operational standpoint. It is something that can happen with a relatively small amount of work on the part of the economy, and it hits over a hundred million U.S. workers.

Not only that, this policy has already been done. This is an important consideration in any policy proposal. In short, we could do this helicopter drop starting in Q4 2013 very easily.



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3 years 9 months ago

If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.”
This is a great idea. My suggestion is we payroll tax cuts to provide this helicopter drop.

I don’t prefer the language of helicopter money. Milton Friedman used it because he simply didn’t have an answer to how money is created. Do we want to confuse others like he confused everyone.

Anyway my main point is different. There is an irony in what I quoted. Beckworth says unlikely it is needed in reality but you agree with him and propose payroll tax cuts – which won’t be needed??

3 years 9 months ago
In the interests of debate, free speech, and contrary views – including raunchy devil’s advocate perspectives – I posted the following at Interfluidity. Perhaps it’s curmudgeonly. Or perhaps there’s a touch of realism. But I do like to keep an eye on some of the overarching design issues for the monetary system: ………………………. http://www.interfluidity.com/v2/4388.html#comment-33713 Nice post. But do we really need to construct Rube Goldberg machines that are more complicated than what we have now? This is fiscal policy. Refundable tax credits in effect. Money in the bank. “Sometimes coordinate with the treasury” is moot in that sense. That mode, insofar as it applies, is not unique here. And what does it mean for the central bank to “provide the funding” in this case? There is no economic rationale for the Fed to “provide the funding” in this case any more than any other case. Treasury and the Fed jointly have a massive portfolio of liabilities, requiring some semblance of an integrated overview. What’s the argument for “providing the funding” in this particular case? The analysis of desirable incremental spending and appropriate incremental funding are two separate issues, each with stronger connections to their own categories than to each other. If there is such an NGDP “law” in place, then Treasury sends the cheques out. It can finance with bonds or bills and the Fed can buy them back. It can be part of the existing QE. But if “providing the funding” is intended to be some kind of change in the institutional arrangements, “convenient” marginal tinkering and slippage is not the best way to do that. And its deficit financing. The laws of accounting don’t get changed just because the proposal is “unconventional”. You keep track of what’s going on, whether the thing is financed by treasury bills, bonds,… Read more »
Detroit Dan
3 years 9 months ago

That makes sense. Thanks.

Did you see Tim Duy’s recent post on “QE”? Falling Inflation Expectations. While acknowledging that:

“Perhaps at best, quantitative easing does not cause higher inflation. At worst, some argue it is actually deflationary.”

he goes on bravely trying explain things on the basis of expectations:

“one could argue that the Fed can indeed affect inflation expectations and really what is going on is that the Fed botched policy. Again… Inflation expectations turned down in March, just when the Fed started sending signals that tapering was on the horizon… In short, just by talking about tapering in an uncertain economic environment, the Fed pulled the plug on a successful policy.”

The graphs in his post seem self-explanatory — QE certainly does not lead to more inflation. I think you’d see same thing if you looked at experience with QE in Japan and the UK.

Anyway, kudos also to Tim Duy for publishing these graphs and clarifying the empirical QE-inflation relationship. But to base expectations for NGDP growth on promises of more QE is ridiculous…

Detroit Dan
3 years 9 months ago

It should be noted that the NGDP targeting part of this is totally superfluous. A credible promise by the government to give everybody money would do the same without the other counterproductive nonsense…

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