Friday, 11 December 2015

John Redwood doesn’t understand helicopter drops.

John Redwood is often said to one of the Tory Party’s intellectuals. Normally I agree with much of what he has to say. But in the second paragraph of this article he says in reference to helicopter money:

“By this they mean the Central Bank creates new electronic money in an account (the modern version of printing notes or clipping coins) and gives it to people. The idea is they would then go out and spend. The sages think that if the economy is working below full capacity then the extra money spent will be more demand, and will bring more of the unused raw materials and labour into use. Clearly the conditions would have to be very unusual. Normally if a Central Bank prints more and gives it away or spends the cash it leads to more inflation.”

Perhaps John Redwood can then explain to us why we’ve had an enormous increase in government / central bank created money over the last two or three years thanks to QE (both in the UK, US and elsewhere), yet inflation is nowhere in sight!!!!

You might argue that QE has not put money in to the hands of the “people” referred to by Redwood, but rather into the hands of the government bond holders who were bought out thanks to QE. Hence (given that the tendency of the wealthy to increase their spending when their stock of cash rises is more muted than in the case of the less well off) that would explain the relatively muted rise in spending and demand and hence inflation. Unfortunately that argument is weak and for the following reasons.

What happened in the recent “QE years” was that governments boosted fiscal stimulus (i.e borrowed more than usual and gave bonds to those it borrowed from). That will have transferred money from the rich to the less well off. The state (i.e. the government / central bank machine) then printed money and bought back those bonds. Net result: cash in the hands of both the rich and poor will have risen, which comes to the same thing as helicopter drops.

Unusual conditions.

Moreover, what’s all that nonsense in the above quote from Redwood about conditions having to be “very unusual” for increased spending not to cause inflation? The only condition needed is that the economy has significant spare capacity, or put another way that unemployment is above NAIRU: which has been the situation over the last seven years or so.

If a firm gets increased orders for its wares and it advertises for more staff, and suitable applicants are two a penny, then wages in the relevant professions / skills / jobs concerned will not be pushed upwards. In contrast, if there are skill shortages in relevant jobs, then wages WILL TEND to be pushed up. Inflation  ensues.

Why I need to spell out this elementary stuff to a supposed intellectual is a mystery.

Are heli-drops desirable?

Having said that, I’m not actually advocating heli-drops (i.e. some sort of system via which every household gets the same amount of cash, or gets an amount inversely related to their income, or whatever). Reason is that heli-drops can be effected via the existing public expenditure system. That is, if you want to feed money into household pockets, why not just cut direct taxes, raise the state pension or something like that? Why set up an entirely new system, staffed by ten thousand bureaucrats to do more or less the same thing?

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