Oh S---! Oh S---!! Oh S---!!!
The $3000 Shirt

Nick Rowe's Two-Handed Stimulus Program: Expansionary Policy, Both Monetary and Fiscal, with Real Helicopters...

He writes:

The (mis-)coordination of monetary and fiscal policy: A commenter on my "loss of faith" post, jj, left the following comment:

So what's up with the new orthodox economists who think that printing money wouldn't work? Are they so orthodox they can't think of how to create money beyond the zero bound? Or because it has never been done in a serious country (kidding!) it is neither proven nor disproven to work, and can't be relied on? Or it's just political realism, because no serious government would try it? I mean it seems so simple and obvious, you don't even need a helicopter, just finance your fiscal programs with new money. Maybe it's TOO obvious for an economist? As a mere armchair economist I'd like to know how there can even be any debate about this. It's just so simple and obvious; just finance your fiscal programs with new money. Money doesn't pay interest, and doesn't have to be paid back (at least, irredeemable base money doesn't), so isn't really debt, in any sense that matters.

He's basically right.... And, by the way, that is helicopter money, and the only real difference I can see between helicopter money and what the Australian government did by mailing out cheques to every household is that the Australian Post Office probably used "utes" rather than helicopters to deliver the mail.... In order to explain why it isn't happening, I've got to make it less simple and obvious; I've got to make it complicated and obscure. Because that's how it will appear to the policy-makers; and explains why they aren't doing it.

Start by consolidating the government and central bank budget constraints: the deficit must be financed by issuing bonds plus issuing base money. So the policy-maker gets a choice between two ways of financing a deficit: any mix between bond-finance and money-finance. But that's not how it appears to the separate fiscal and monetary authorities. The fiscal authority chooses the deficit. The monetary authority does not see itself as choosing the mix between money- and bond-finance; it sees itself as choosing a nominal rate of interest (and that's currently stuck at zero), so it is the market that chooses the mix between money- and bond-finance. The stock of base money is demand-determined. So the policy-maker won't be asking "Should I make the deficit bond-financed or money-financed?". Instead, the fiscal policy-maker should be asking "Will the deficit be bond-financed or money-financed?", and the monetary policy-maker will reply "Dunno, I just set the interest rate on short-term safe loans". That's the first complication, converting the normative question of whether the deficit ought be financed by money or bonds into a positive question of whether the deficit will be financed by money or bonds. The second complication has to do with whether the deficit is merely temporarily money-financed or whether it is permanently money-financed. It makes a big difference.

A temporary increase in the money supply... will make little difference... no difference to the government's future tax liabilities.... The helicopter money thought-experiment was always understood, at least implicitly, to be a permanent increase in the money supply. The helicopter operation was not expected to be followed by a vacuum cleaner operation 6 months later.... So, we have to change the question once again. Instead of asking whether today's deficit ought to be money-financed today, we need to ask will today's deficit be money-financed permanently? And the answer to that question ain't so obvious.  It's not obvious to economists. More importantly, it's not obvious to policy-makers who must choose whether or not to run a deficit. And much more importantly still, because expectations matter for aggregate demand, and matter more than anything else, it is not obvious for ordinary people who make spending decisions.

At this point I am tempted to go off on an obscure rant about the disasterous consequences of central banks' choosing the promote the social construction of monetary policy as setting interest rates, because that is precisely what is making it so hard for people to see a money-financed deficit for what it is.... So, is it obvious to you whether deficits will be money-financed under the current monetary regime? No, and it ain't obvious to policy-makers either. Nor to ordinary people.... [Y]ou... need real helicopters, to make it obvious.