Wednesday, 11 May 2011

Brad de Long should read Abba Lerner.

I admire Brad de Long for his willingness to come out of his academic ivory tower and get involved in street fights with economics bloggers. But this article of his contains a mistake.

He says that when interest rates are zero “the government cannot inject extra safe and liquid money into the economy through standard open-market operations: a three-month Treasury bond and cash are both zero-yield government liabilities, and buying one for the other has no effect on the economy-wide stock of safety and liquidity.”

It’s true that at zero interest rates “standard open-market operations" cannot do any more. But there is an alternative: a helicopter drop, as Bernanke pointed out.

However I’m not advocating a helicopter drop. A better way of increasing the stock of safe and liquid assets is the MMT way, which admittedly is not vastly different to a helicopter drop. This is simply to raise public spending and cut taxes without any form of borrowing to fund the operation. I.e. just have the government / central bank machine create or “print” new money and spend it.

The latter “cut taxes” element amounts to the same as a helicopter drop: it involves leaving money in household bank accounts. On the other hand the “raise public spending” element is different, in that households cannot get hold of the extra money other than by working on government funded operations (i.e. in state schools, law enforcement, road building and the usual state funded activities).

When de Long appreciates that, will he become as enthusiastic a supporter of MMT as James Galbraith? Or have I missed something?

And finally as regards which bit of Lerner to read, I recommend Lerner’s book “The Economics of Control”, p. 307, starting at the heading entitled “The purpose of taxation…..”

1 comment:

  1. Ralph, the Fed can increase nongovernment NFA under its emergency powers by buying stuff in the domestic private sector. It did this is QE1 by purchasing non-government bonds, for example, whereas under ordinary circumstances it can only deal in government securities.

    While the Fed would likely limit itself to financial assets, there is no specific prohibition on purchasing real assets, too, in extremis. So the Fed could exercise fiscal powers in addition to monetary powers, I believe, but only under its emergency powers.


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