Sunday, 7 August 2016
Biagio Bossone believes in Ricardianism..:-)
Biagio Bossone (of the IMF and World Bank) claims that for helicopter money to work, the central bank has to “credibly commit never to withdraw the increase in reserves.” (Reserves are the same as heli money.)
This is a fuller quote.
“There is broad agreement that helicopter money is best regarded as an increase in economic agents’ nominal purchasing power in the form of a permanent addition to their money balances. Functionally, this is equivalent to an increase in the government deficit financed by a corresponding permanent increase in non-interest bearing central bank liabilities… The central bank credibly commits never to withdraw the increase in reserves.”
Now the basic idea there is what’s known as “Ricardianism”, namely the idea that households and firms calculate what government is likely to do in the future, and that households and firms adjust their spending to suit. E.g. they allegedly calculate that if they come by a windfall as a result of a helicopter drop, and that if they think government will withdraw that money at some time in the future, then households and firms WILL NOT spend the money, since they have to keep that money in stock so as to be able to pay the extra taxes that enable government to withdraw said money.
Now of course for anyone with a grain of common sense, the latter idea is straight out of la-la land. I mean are we seriously supposed to think that the average household even knows how many dollars are involved in a particular bout of helicoptering or what a particular household’s share of that money is?
The reality (and this is supported by empirical evidence) is that households’ spending is heavily influenced by what they’ve got in the bank. I.e. if they come by extra money from whatever source (tax rebates, winning a lottery, helicopter money, etc), they spend a significant proportion of that money (surprise, surprise).
As Joseph Stiglitz rightly said, “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.”
But for professional economists the important thing about Ricardianism is that it’s an extra bit of complexity they can add to their papers and mathematical models. I.e. Ricardianism keeps them employed.
As Upton Sinclair put it, “It's hard for a man to understand something when his salary depends on his not understanding it.”
Positive Money (which advocates a form of helicoptering) ignores Ricardianism, far as I know. Quite right.