Saturday, 30 May 2015
The justification for helicopter drops.
Simon Wren-Lewis (Oxford economics prof) argues here and here that a justification for funding fiscal stimulus via money creation rather than borrowing is that governments have a fetish about rising national debts. Thus an alternative way of funding fiscal stimulus is desirable. (Incidentally Keynes pointed out in the 1930s that stimulus can be funded either via new money or via borrowing, see 5th para here)
Well there’s a problem with SW-L’s argument namely that one then ends up with TWO BODIES doing fiscal stimulus: the treasury and the central bank. That’s not much different to a car with two steering wheels: not a brilliant arrangement.
So is there a better justification for helicoptering? The answer is “yes”. As I’ve been pointing out for a few years now, standard “borrow and spend” fiscal stimulus is defective in that the object of the exercise is STIMULUS, but the effect of BORROWING is the opposite. That is, the simple fact of government borrowing, i.e. withdrawing cash from the private sector is DEFLATIONARY.
So conventional “borrow and spend” fiscal stimulus a bit like the fire brigade throwing petrol on a fire before squirting water on it. Or if you like, it’s analogous throwing dirt over your car before washing it.
One apparent problem with money funded fiscal stimulus comes if and when the process needs to be reversed: there might seem to be a problem in that the state then doesn’t have an asset to sell if and when it needs to WITHDRAW money from the private sector at a later date. Well the state DOESN’T NEED an asset to sell! It can simply wade into the market and offer to borrow billions at above the going rate of interest, and send the bill for the interest to the taxpayer.
Existing legislation in some countries may not allow the central bank to do that, but there’s no good reason it SHOULDN’T.
Another reason why “print and spend” might be difficult to reverse is that it’s easy enough to print money and spend it on goodies for the population: if you’re a politician, that’s bound to make you popular. However doing the opposite, namely raising taxes makes you UNPOPULAR.
On the other hand reversing “borrow and spend” isn't all plain sailing. The latter consists of borrowing off the wealthy and spending on the population as a whole, while giving bonds to the wealthy. Well reversing THAT (i.e. taking cash off the less well-off and returning it to the rich) won’t win you votes EITHER.
Political versus economic decisions.
Another apparent problem with money funded fiscal stimulus (or “sovereign money” funded stimulus as Positive Money calls it) is that it might seem that the central bank then determines the size and nature of that stimulus: that is, it might seem that essentially POLITICAL decisions are then in the hands of unelected central bank economists.
In fact there’s no need for technocrats to take essentially political decisions. That is, it’s perfectly feasible to have some central bank committee of economists (or indeed any other similar committee) determine the SIZE of a stimulus package, while clearly POLITICAL DECISIONS like what proportion of GDP is allocated to public spending and how that is split between education, health and the usual public spending items is left to politicians and the electorate.
The latter point is enlarged on here and in other Positive Money literature, if you want that explained in more detail.
Indeed, the ULTIMATE say in the size of any stimulus package is ALREADY in the hands of the central bank – at least in the UK and US in that those CBs have ultimate responsibility for inflation. That is, the Fed and the BoE, if the think that conventional fiscal stimulus is excessive, can negate that with interest rate hikes.
The latter points about the distinction between the SIZE of a stimulus package and its NATURE OR MAKE UP seems to be beyond the comprehension of a number of vociferous individuals, e.g. Neil Wilson, as I explained here. Also Anne Pettifor doesn’t understand the point. However, for most people with a bit of common sense those points are easy enough to understand.