Friday, 13 May 2016

Prof Joerg Bibow goes off the rails.

He claims in this letter to the Financial Times that

“As long as central banks take their price stability mandate seriously and buy government bonds in the open market when their mandate requires, governments can focus on spending and not worry about helicopters. The fact that today’s elected governments renege on their responsibilities and ruin our grandchildren’s economic possibilities is regrettable. But it does not mean that unelected central bankers should mail out cheques (money drops) to taxpayers instead.”

First, and re “buy government bonds”, that’s QE (assuming we’re at the ZLB). And in case Prof Bibow hadn’t gathered, QE doesn’t have a huge effect (apart from boosting asset prices and making the rich richer).

Second, he’s suggesting that if there’s excess unemployment, homes are being re-possessed, beggars line the streets, and soup kitchens are overflowing with customers, we sit around saying “that’s regrettable”. That is irresponsible nonsense.

The purpose of an economy is to produce what people want. If not enough is being produced to keep the workforce fully employed, the solution is to give people more of that which enables them to buy more of what they want. That stuff, perhaps unbeknown to Prof Bibau, is called “money”.

The proportion of GDP taken by the public sector.

There is however one not bad criticism that can be made of helicoptering. It’s that there’s an element of a POLITICS in showering money on households: it increases the PROPORTION of GDP going to the private, as opposed to the public sector.

That semi political decision taken by the central bank is possibly justifiable on the grounds that cutting excess unemployment takes precedence over the relatively unimportant point that government’s preferred mix of public and private sector has been upset a bit.

Certainly if we were to have a referendum on that point, there’s no question which way the vote would go. That is, suppose we asked voters the following question. “If the central bank thinks unemployment is excessive, and that it can be reduced by giving households more money, even though that results in the private sector being somewhat larger relative to the public sector than politicians want, would you want to have that extra money to spend (or save, if you so wished)?”

There’s no question as to which way the vote would go. Thus helicoptering is,or could, given a referendum, be entirely democratic.

But for those who still don’t like any disturbance whatever of the above public / private ratio, there’s a solution – or a solution of a sort. That’s for the central bank to dish out a proportion of the money to government departments and other public bodies with the instruction to the effect: “Hi folks. It’s OK by us if you use this money to increase your expenditure over the next six months or year. Seems politicians are too busy fiddling their expense sheets to bother spending enough to mop up excess unemployment. So why not just get on with it, and spend a bit more?”

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