Thursday, 13 November 2014

More reaction to Adair Turner’s FT article.

Adair Turner in the Financial Times recently advocated a kind of merge between monetary and fiscal policy (or if you like a merge between central bank (CB) and treasury). That is, given a need for stimulus, Turner suggested having the state simply create new money and spend it, or cut taxes: i.e. fund the deficit with new money rather than with debt.

Many others (e.g. Positive Money and Richard Werner) have suggested the same, and one advantage is that if there is less state debt, then there is less of an interest rate burden.

Simon Ward in a letter to the FT disputes that on the grounds that interest rates still have to be adjusted and if the stock of state issued money expands, the CB will have to pay interest on that (as indeed many CBs currently do).

The answer to that is that IDEALLY, i.e. if the state gets it just right, it will issue just enough money to give us full employment without any need to pay any interest on any of that money. Of course, irrational exuberance will occur periodically, and the state will need to impose some sort of deflationary measure. That COULD TAKE THE FORM of raising taxes and “unprinting” the money collected. But if that’s not enough, then having the state offer to borrow back some of the money it has issued is obviously an additional deflationary tool that can be used.

But that does not invalidate Turner’s initial point, namely that given the need for stimulus, it’s bizarre to do something which has a DEFLATIONARY effect, namely have the state BORROW MONEY! Why borrow money when you can print the stuff?

Fifteen love to Turner so far.

Daniel Aronoff.

Aronoff also questions Turner’s proposal in a letter in the FT. His first objection is that the historical record on debt monetisation or giving politicians access to the printing press is not encouraging.

The flaw in that argument is that advocates of the “print” option are well aware of that danger, and propose a system that deals with that problem. (See the submission to the Vickers commission by Richard Werner and others, in particular bottom of p.10-p.12).

Aronoff’s second objection is that “helicopter money is very difficult to take out of circulation once it has been created”. And he goes on to laud the ease with which a CB can withdraw money from circulation by re-selling bonds.

Well it’s true that raising taxes (with a view, as suggested above, to “unprinting” the money collected) can be politically difficult.

However, even if there were no state issued bonds at all, there’d be nothing in principle to stop a CB just announcing, “We’re in the market for money, and we’re paying above the going rate. Hurry, hurry while this too-good-to-miss offer lasts”.

Doubtless some CBs are not allowed to do that under the legislation in their country, but that’s a technicality: the law can be changed.


Adair Turner is right: the best form of stimulus is simply to have the state create money and spend it, and/or cut taxes. IDEALLY the state issues just enough to give us full employment. But private sector demand is never predictable: bouts of irrational exuberance do occur. And when that happens, it may be necessary to supplement attempts to withdraw money via tax with raised interest rates. But that does not invalidate Turner’s basic point, namely that IN THE FIRST INSTANCE and given a need for stimulus, the best option is simply “print and spend and/or cut taxes”. 

(Incidentally, having said "Turner is right", I still don't agree with his claim that PERMANENTLY higher interest rates are desirable, as I pointed out here.)

Endnote: state borrowing to fund infrastructure.

A legitimate querie here is that even if we rule out state borrowing to fund deficits, that does not necessarily rule out state borrowing to fund infrastructure and other state owned investments.

The answer to that point is perhaps that the state AS CURRENCY ISSUER, should be kept separate from the state AS ENTREPRENEUR (i.e. builder and operator of roads, etc).

If it’s legitimate for a private contractor to borrow so as to fund a road, bridge etc, it’s hard to see why it doesn’t make sense for the state to do likewise. But to repeat, that’s all separate from the state as currency issuer.

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