Democratic Helicopter Money and the non-observance of two counterfactual conditionals

I give my kids $100 and tell them to spend it not save it.

1. How can I tell whether my kids have really spent $100 more than they otherwise would have spent? Maybe they would have spent $100 anyway.

2. How can my kids tell whether I have really given them $100 more than I otherwise would have given them? Maybe I would have given them that $100 (plus interest) anyway, in my will, and I am simply giving it to them earlier rather than later. Maybe it's not a permanent increase in the amount of money I give them. Maybe they aren't any wealthier than they would have been otherwise.

Simon Wren-Lewis's proposal for "Democratic Helicopter Money" , in which the central bank prints an extra $1 billion, gives it to the government, and tells the government to spend it not save it, faces exactly the same two problems.

The government owns the central bank, which is like the government being the sole beneficiary in the central bank's will. Any profits the central bank earns from printing money must eventually get given to the government anyway. If the extra $1 billion is a permanent increase in base money, relative to what the time-path of base money would otherwise have been, then the government is $1 billion wealthier, whether it gets that $1 billion now or later (plus interest), and it must get it eventually. And if it's not a permanent increase in base money, relative to what the time-path of base money would otherwise have been, the government is not $1 billion wealthier, so an extra $1 billion fiscal deficit will be bond-financed, not money-financed, sooner or later.

Money is fungible. Helicopter Money is permanent, or it's not Helicopter Money. True Helicopter Money is equivalent to an increase in the Price Level Path (or NGDP Level Path) target.

(There's definitely a Principal-Agent Problem, and maybe a Rotten Kid Theorem, in here somewhere.)

[I've said all this before, but maybe I've said it clearer and simpler this time. Does the kid analogy work?]

Update: Simon responds.

Comments

[Majromax]

Point 2 can still function if your kids are liquidity-constrained, of course. We can also get there with an approximate liquidity constraint: if your kids prefer to spend a certain fraction of their income on debt service then a windfall will be spent to the extent that they interest rate they pay on debt exceeds the discounted present value of the inheritance+interest rate the bequest would earn. (In turn, changes to broad risk premiums act like liquidity constraints. We've seen this in Canada with retail bank "prime" rates not fully mirroring changes to the BoC rates.)

> Money is fungible. Helicopter Money is permanent, or it's not Helicopter Money. True Helicopter Money is equivalent to an increase in the Price Level Path (or NGDP Level Path) target.

That's a real problem, then, because central banks don't have level path targets. You've just strongly implied that every time a central bank receives a negative inflation-surprise, it's implicitly conducted a helicopter lift.

[Peter K.]

What the kid analogy doesn't get at is the deficit-obsession of politicians and policy makers. Wren-Lewis writes about a "world obsessed by government debt." Maybe it isn't as true in Canada where Trudeau won with a campaign promise of deficit spending.

I believe Kocherakota and Krugman have written similar criticisms of Helicopter Money.

But in world where politics trumps economics, and the central bank is trying to jump start the economy, fiscal policy makers believe they only have so much room before they get in trouble with debt. With democratic helicopter money the central bank tells them you have more room than you thought and here is some money to spend or use as you like rather than using that money for asset purchases. The central bank is not going to offset the helicopter money it gave the government to use.

Say the kid received $100 every month. They spend it all and would spend more if possible. You give them another $50 one month which the gladly spend even though they know they'll receive another $100 next month.

[Ralph Musgrave]

How can I tell whether my kids / government have really has spent the extra money or spent $X more than they otherwise would have spent? Well government is hardly likely NOT TO SPEND it is it? I mean extra government spending (and/or tax cuts) makes politicians popular. Why on Earth WOULDN’T they spend it?

In addition, all you have to do to see if total government spending at the end of the year is more than the previously planned total.

[David Beckworth]

Nick, as you point out, a successful helicopter drop requires a permanent increse in the price (NGDP) level. What this implies is that all the current talk about helicopter drops is putting the cart ahead of the horse. Attempting a helicopter drop witout changing the dominant monetary regmie of (low) inflation targeting will be an exercise in futility. It seems to me that many of the helicopter enthusiasts miss this point.

Along these lines, I wonder how we get from where we are to level tageting. Central banks have been so good at targeting low inflation that it is the expectd norm by the body politic. Any deviation is intolerable, as seen by the media, congress, and even Fed officials. How do we get out of this inflation-targeting straightjacked?

[Roger Sparks]

It is certainly nice to give the kids $100, spend it don't save it.

BTW, you also said don't bother to mow the grass or weed the flower bed. I'll wash the dishes and fill the gas tank. Just go out and get rid of $100.

Did you forget that you were communicating a lot more than just "you are a nice guy"?

[Lord]

All is change until the universe ends. There is no permanent.

Permanent is only relative to what our expectations would otherwise be and those expectations aren't permanent either. If we don't know what eventuality that will be, we have no basis to assume it. Occam says to assume nothing further.

[Ralph Musgrave]

Nick,

Your claim that politicians might NOT spend money allotted to them is wholly unrealistic: spending money (or cutting taxes) makes politicians POPULAR. It helps them win elections. Why on Earth wouldn’t they spend that money?

As to how to check up on whether they’ve actually spent it, that easy: at the end of the quarter or year just see what they’ve spent compare to what the PLANNED spending figure was.

David Beckworth,

You claim that those in favor of helicopters are unaware that helicoptering would probably raise inflation somewhat. I’d have thought it was pretty obvious that extra spending raises inflation.

[JKH]

In other words, the term "permanent" is pretty useless without further context. That was my immediate impression when I read Krugman's old liquidity trap stuff.

I think the context should among other things differentiate between the discretionary nature of the path for bank reserve balances (e.g. QE) as determined by direct central bank policy action, and the non-discretionary nature (more or less) of the path for currency growth as determined by the public's demand for same.

E.g. if you assume a future positive growth path for currency, then eventually the public's demand for currency will dominate (i.e. convert) the "permanence" of any particular chosen level of QE today. Those excess bank reserve balances will eventually disappear, other things equal.

So I think you have to be a lot more specific about future scenarios than the overly simplistic idea of permanence.

[paul]

i in the question shows the very problem with tax avoidance/havens and evasion,the money is created for the supply side but if it doesn't cross over to the other side of the equation to the demand side their no way it can be paid back! ii all helicopter money really does is re-balance the poor trades that got us here!(if the money goes to those that have obviously lost out)(the only reason sometimes QE works and most times it doesn't)then unless those poor trades are eliminated and forced to be good trades,then helicopter money has no option but to be permanent,because the cycle will never be broken.

[Nick Rowe]

Majro: I think you are right if the kids/government are borrowing-constrained.

"That's a real problem, then, because central banks don't have level path targets. You've just strongly implied that every time a central bank receives a negative inflation-surprise, it's implicitly conducted a helicopter lift."

Yep. (But we call it a "vacuum cleaner", not a "helicopter lift".)

David: " Attempting a helicopter drop witout changing the dominant monetary regmie of (low) inflation targeting will be an exercise in futility. It seems to me that many of the helicopter enthusiasts miss this point."

Yep.

A movement to Price-Level Path targeting seems to me to be a fairly small step, politically, and in terms of communication. You can sell it as just a stricter version of targeting 2% inflation, where you slowly fix any past mistakes (though it maybe also allows you more flexibility in the short term). NGDP targeting would be a bigger step.

Lord: suppose there is a finite horizon T, where all existing central bank money will be redeemed at a price level P(T), and the monetary system starts afresh. Helicopter money means raising P(T) in proportion.

Ralph: Maybe their announced plans (budgets) take HM into account. How could we tell?

JKH: Well, defining "permanence seems to be equally a problem both for me and for advocates of HM.

[Majromax]

> Yep. (But we call it a "vacuum cleaner", not a "helicopter lift".)

Damnit, thank you for the correction. The right phrase was on the tip of my keyboard but slipped my mind.

> A movement to Price-Level Path targeting seems to me to be a fairly small step, politically, and in terms of communication. You can sell it as just a stricter version of targeting 2% inflation, where you slowly fix any past mistakes (though it maybe also allows you more flexibility in the short term).

I think the easiest way to sell it would be via a "flexible inflation target", where the medium-term target itself varies from (say) 1-3% to fix the long-term price level. The BoC is close to this already with its inflation band approach, but even still long-term bond rates imply expectations of only 1.5% inflation ("Long term" nominal GoC bonds at about 2%, with "Long term real-return" bonds at 0.5%.)

[JKH]

One of SWL's examples sort of defines permanence - implicitly - as the indefinite existence of a negative capital position for the central bank as a result of HM. Conversely, a government decision to recapitalize the CB with bonds signals at least the potential for unwinding the original HM injection, if not the end for an otherwise permanent HM injection.

Doesn't say anything about counterfactuals, but I suppose that's one way of looking at it.

[Peter K.]

"1. How can I tell whether my kids have really spent $100 more than they otherwise would have spent? Maybe they would have spent $100 anyway."

The analogy between kids and a government doesn't really work. Also the conception of what a central bank can do politically is off in my opinion. After the crisis, the Federal Reserve did as much QE as they thought was politically possible. They were under a lot of pressure to stop and reverse QE. I bet they would have taken advantage of a mechanism by which they could provide more stimulus - in order to get back to target inflation sooner and minimize hysteresis - without taking any more heat politically. They'd say here, we're not buying any more assets - but instead are giving the fiscal authorities more room to provide stimulus. In a recession with the central bank at the ZLB, the government is going to spend what it can politically speaking. If given more room to spend (or cut taxes), they would take the addition fiscal action. There is no question whether the kids would spend $100 more than they otherwise would have.

I just don't buy the central bank does monetary offset as perfectly as they would like. There are political considerations. Bernanke constantly asked for fiscal help from Congress and complained that Congress was making their job more difficult. This is not to say we shouldn't switch to an NGDP path level target.

[Peter K.]

Bernanke in a recent blog post on helicopter money:

"However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out."

Why would he write this if he believed the Fed would or could offset fiscal action or he believed the government wouldn't take advantage of the new fiscal space?

[Roger Sparks]

When government just gives money away, it really is like giving money to the kids. The kids will probably buy toys and that is probably what most of the money will buy if government just gives it away.

The real reason for government to give money away is usually spun as a way to put people to work. If putting people to work really is the goal, the money would be far better spent if government directly took the responsibility for employment.

Just being practical, if money is given out, it would have a path from CB to citizen. If the path is direct from CB to citizen, there will be a lot of toys purchased from foreign nations. If the path is not direct but has a dog-leg, the path would be from CB to worker to citizen. At least something useful (like maybe a pyramid) would be built before the money ultimately arrived in the hands of citizens.

There would still be plenty to argue about. One man's version of a "living wage" may be quite different from the version offered by the man (not the government) paying the wage. We might even argue about how many pyramids to build at one time, if we had time to argue at all.

[Ralph Musgrave]

Roger Sparks,

“Putting people to work” is not the basic economic objective. The basic objective is that plus maximising utility or satisfaction that the population derives from the resources available. We have decided as a society that determining what maximises satisfaction shall be decided to a significant extent by democratically elected politicians, rather than the market. If the electorate and democratically elected politicians decide that satisfaction is best maximised by skewing the system towards "give aways" (e.g. basic income for all, increased state pension, increased sickness benefits) then so be it.

[Ralph Musgrave]

Bernanke and Wren-Lewis present helicopter money (HM) as a device to be used in extremis, e.g. at the ZLB. Actually there are good arguments for abolishing traditional fiscal and monetary policies and making HM the NORMAL method of adjusting demand. There are two main reasons, as follows.

First, the existing or traditional system involves TWO different bodies having a say on stimulus: the treasury / politicians on the one hand, and the central bank on the other. That makes as much sense as a car with two steering wheels. In contrast, an HM system where the CB determines the AMOUNT of stimulus, while democratically elected politicians decide the NATURE of stimulus (e.g. which government departments get the money), makes much more sense.

Second, interest rate adjustments are fundamentally illogical. Reason is that given a need for an adjustment to demand, there is no more reason to channel that adjustment into the economy via just borrowing, lending and investment than there is to channel it into the economy via adjusting spending on any other random set of items: say ice-cream, education, condoms and subsidised holidays.

[Jussi]

It is IMO certain that people will use part of it if you give them enough. If they use part of it the central bank can reach any target.

[Too Much Fed]

JKH, could you look at my comment here:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2016/05/adding-more-periods-to-the-diamond-dybvig-model-fear-of-illiquidity-not-insolvency.html

May 6, 2016 at 8:23 PM

Thanks!

[ignormaus]

Following up on what Ralph Musgrave wrote:

There is a huge difference between the state and the politicians who currently "make up" the state's government. The same way there is a huge difference between banks and bankers.

The central bank belongs to the state not the government (we can consider the government to be like the executives). While the state itself may be very long-lived and thus from a theoretical perspective it may make little difference on whether the money is indeed genuinely a "permanent bonus" or merely a shift in time, to the current government it can make a massive difference in terms of their interests. And the interests of the "long-lived" entity and those running it do not have to align; for example, bankers making highly leveraged bets and getting huge bonuses, even though the bets eventually result in the bank's collapse (hence the need for claw-back, delayed bonuses, etc.).

Under this thinking the path dependency is less of an issue - we can generally expect that there will be some constituency which the government wishes to please; while this may be through (hopefully) wise investment, it can also be "spent" through various more corrupt or "captured" aspects.