Scott Sumner and Bill Woolsey have been fighting valiantly against the Austrians. The fight is about "Cantillon effects" -- non-neutralities of money that are supposed to arise not from the increase in the money supply itself but from where exactly that new money enters the economy.
Sometimes you get a clearer answer to a question if you change the question. That's what I'm going to do here.
Let's stop asking whether the effect of a change in the level of the money supply depends on where that new stock of money enters the economy. Instead, let's assume the money supply is growing at a constant rate, and ask whether it matters where that constant flow of new money enters the economy. We are simply redirecting that constant flow of new money, not changing the stock and redirecting it at the same time. It's easier to keep our heads straight that way.
1% of GDP isn't peanuts. But it's not very big either. And I've stacked my assumptions to make it bigger than it would be in most normal economies. If NGDP is growing at 5% per year, and base money is 5% of NGDP, the flow of new money would be 0.25% of NGDP.
I will assume the government owns the central bank. Any profit the central bank gets from printing money is government revenue. We can consolidate the government's and central bank's balance sheets, so any interest the government pays on bonds owned by the central bank is a wash. The government is paying that interest to itself. The central bank earns profits of 1% of GDP, and gives those profits to the government, which decides how to spend them.
Let's compare 5 different ways the same flow of new money could enter the economy.
1. Interest on money. The baseline scenario is that all new money is paid as interest on existing money. So every year people earn 10% interest on their money, which exactly offsets the 10% depreciation through inflation. It's a wash. It's really just like a stock-split.
2. Helicopter money. Scenario 2 is that all new money is paid as transfers to the population. It's no different from scenario 1, except that the opportunity cost of holding base money is higher (because it depreciates through inflation but doesn't pay interest), so the real stock of money would be smaller. (Plus some individuals might get lucky and others unlucky depending on whether the helicopter does or does not fly over them.)
2a. Cut taxes. The government uses the new money to cut taxes. Same as scenario 2. A tax is a negative transfer payment. So a tax cut is a transfer increase.
3. Debt reduction. Scenario 3 is that all new money is handed over to the government, which uses it to retire government bonds. Scenario 3 is the same as an open market purchase of bonds by the central bank. Scenario 3 is identical to scenario 2, plus a tax of 1% of GDP used to pay down the debt. Does it matter if the government increases taxes to pay down debt?
4. Government spending. Scenario 4 is that all new money is handed over to the government, which uses it to buy goods. Scenario 4 is identical to scenario 2, plus a tax of 1% of GDP used to buy goods. Does it matter if the government increases taxes and spending? Obviously it matters whether the government buys bridges or schools or roads or whatever. One gives us more bridges and the other gives us more schools, or roads, or whatever.
5. Other financial assets. Scenario 5 is that all new money is used to buy some other financial asset, like shares in IBM. Since the government owns the central bank, it doesn't matter if it is the government or the central bank that buys the IBM shares. Scenario 5 is identical to scenario 2, plus a tax used to buy IBM shares. Scenario 5 is also identical to scenario 3, plus a bond-financed purchase of IBM shares. Does a bond-financed purchase of IBM shares matter? I expect it depends on how close substitutes the two assets are in people's portfolios.
Sorry. What was the question again? Was it: "Do Cantillon effects matter?" Or was it "Does fiscal policy matter?" I can't tell the difference. There is no difference. "Cantillon effects" are just another name for "the effects of fiscal policy".
OK. I suppose that Austrian economists believe that fiscal policy matters. I suppose it does. And monetary policy has fiscal implications, because a faster growth rate of the money supply will mean bigger seigniorage profits for the government (as long as we stay on the left side of the Laffer Curve).
But the size of those fiscal implications depends on the ratio of the monetary base to nominal GDP.
In Canada, non-interest paying currency is currently around 4% of nominal GDP. An increase in the inflation target from the current 2% to 12% would mean a 10 ppt increase in the growth rate of the money supply. That would be a very big change in monetary policy. Even if the currency/NGDP ratio stayed the same at 4% (it would fall), the fiscal implications of that very big monetary policy change would be 0.4% of GDP.
What do you think would be the bigger deal: increasing the inflation target from 2% to 12%, or changing taxes or government spending by 0.4% of GDP?
[Update: hoisted from comments. J. V. Dubois says:
"You guys really do not get the gist of what Nick is saying?
1. Seigniorage of government controlled money IS TAX on base money
2. "Where" and how much of newly printed money is injected - even if that has any effect on redistribution IS FISCAL POLICY.
If you say that it makes a great deal of difference (deforming long-term capital structure etc) if money is injected into salaries of government employees vs purchase of bonds, then you by the same argument think that it makes a great deal of difference if government decides that from now on it spends 0.25% of GDP gathered in taxes on one versus another.
If you for instance say that Bond Dealers gather undue profits from these bond operations of the size of 0.25% GDP - then by the same account you have to be outraged that those very same bond dealers gather undue profits from regular yearly government deficits an order of magnitude higher. It is a problem of interest group capturing government and preventing competition from access to the bond market, it is not a problem of money printing."]