Tuesday, 7 June 2016
Skidelsky opposes helicoptering… then supports it.
I normally agree with Robert Skidelsky, but he goes a bit off the rails in this article where he initially attacks helicoptering, before concluding that it’s not such a bad idea.
By way of attacking helicoptering he quotes a not too brilliant passage from Keynes, as follows.
“For whilst an increase in the quantity of money may be expected…to reduce the rate of interest, this will not happen if the liquidity-preferences of the public are increasing more than the quantity of money.”
Now that’s like saying that turning up the central heating won’t make the house warmer if at the same time someone opens all the windows and doors. Or to put it in more general terms, when it’s claimed that A and B are positively related and that cause / effect runs from A to B, the normal or common sense assumption is that increasing A will increase B. Of course, implicit in that common sense argument is the very reasonable “all else equal” assumption.
To put it less politely, if I said that turning up the central heating makes the house warmer, and someone responded by saying “not if someone opens all the doors and windows”, I’d tell that someone exactly what to do with himself.
Moreover, even if someone DOES open all the doors and windows, if the central heating emits ENOUGH HEAT, the house will get warmer DESPITE the doors and windows being open.
Likewise, even if the public’s liquidity preference DOES INCREASE a bit, a big enough money supply increase will outweigh the latter effect.
Next comes this passage in Skidelsky’s article:
“Economists are now busy devising new feats of monetary wizardry for when the latest policy fails: taxing cash holdings, or even abolishing cash altogether; or, at the other extreme, showering the population with “helicopter drops” of freshly printed money.
The truth, however, is that the only way to ensure that “new money” is put into circulation is to have the government spend it. The government would borrow the money directly from the central bank and use it to build houses, renew transport systems, invest in energy-saving technologies, and so forth.”
Now there are a few problems with that passage. First, whence the assumption that the only way to “ensure that new money is put into circulation is to have government spend it”? That is, if government does “shower the population” with “freshly printed money”, why would that money not then be “in circulation”? I mean does the average lottery winner on receipt of their new found pile of cash bury it underground or just leave it all in a bank term account?
Clearly not! They SPEND a significant proportion of that cash: i.e. put it into “circulation”.
Second, the passage from Skidelsky’s article quoted above actually contains an element of POLITICAL bias, which is not something a professional economist ought to do. That is, in advocating more public spending, Skidelsky is adopting a left of centre stance. But the government of the day might be right of centre and might be aiming to CUT public spending, in which case, given a need for stimulus, that government would aim to increase PRIVATE spending rather than PUBLIC spending. Such a government could get more money into “circulation” by cutting taxes or raising social security benefits (the former being more right of centre than the latter of course).
In short, instead of advocating more public spending, Skidelsky ought to have used a politically neutral phrase like “raise the deficit” or similar.
Of course it may be that we get a better so called “bang per buck” from public spending as compared to tax cuts, but that is irrelevant, and for two reasons. First, the democratic choice of the population takes precedence over minor technical matters like bang per buck: that is if voters want more (or less) public spending, government should comply with voters’ wishes.
Second, the entire bang per buck concept is irrelevant. Reason is thus. Advocates of the bang per buck idea view money at government’s disposal as some sort of REAL COST. It isn't: government (assisted by the central bank) can create infinite amounts of new money at the press of a computer mouse, and at NO COST.
Thus if the average household has to be supplied with rather a large amount of cash to induce it to up its weekly spending, what of it? The cost of supplying that cash is zero. Or as Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.” (Ch3 of his book “A Program for Monetary Stability”).
(BTW: hat tip to Mike Norman for drawing my attention to the Skidelsky article.)