Thursday, 24 March 2016

Kocherlakota on helicopter money.

Narayana Kocherlakota wrote a Bloomberg article entitled “Helicopter Money Won't Provide Much Extra Lift”. His basic point is that there’s nothing a central bank can do that government and central bank in cooperation can’t also do.

As he puts it, “The crucial point here is that there's no need to employ helicopter money if the government is willing to use its powers to help central banks generate inflation.”

Well that’s the whole point: helicopter money is only contemplated when government (aka politicians) ARE NOT doing enough. So therein lies the basic merit of helicoptering.

But that raises a big problem, which is that the central bank then has to decide WHO to bestow it’s money on. Pensioners? Schools? Ordinary households? Some government department? That sort of decision (e.g. what proportion of spending goes the public sector rather than the private sector) is a clearly POLITICAL decision. And that’s not within the remit of central banks.

There is however a solution, which is for the central bank to distribute the money (e.g. as between public and private sectors) in the SAME PROPORTION as spending already is distributed between those two sectors. That’s pretty neutral politics wise. And as far as distribution WITHIN the public sector goes, the CB could again give different government departs and state bodies more money IN PROPORTION to their existing budgets.

Another important point that can be taken away from that discussion is that while politicians are clearly entitled to take political decisions, they are equally clearly not qualified to decide how much stimulus is suitable.

So… how about politicians sticking to political decisions, and central banks having complete control of stimulus (monetary and fiscal)?

Now what d’yer know? That’s exactly the split of responsibilities advocated four years ago in this work by Positive Money, Prof Richard Werner, and the New Economics Foundation.

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