Yes, in Some--Many--Ways Our Macro Debate has Lost Intellectual Ground since the 1930s. Why Do You Ask?


Over at Equitable Growth: Last September, the illustrious Simon Wren-Lewis wrote a nice piece about the Bank of England's thinking about Quantitative Easing: Haldane on Alternatives to QE, and What He Missed Out.

Simon's bottom line was that Haldane was not just thinking inside the box, but restricting his thinking to a very small corner of the box:

[neither] discussion of the possibility that targeting something other than inflation might help... [nor] any discussion of helicopter money...

And this disturbs him because:

We rule out helicopter money because its undemocratic, but we rule out a discussion of helicopter money because ordinary people might like the idea.... Governments around the world have gone for fiscal contraction because of worries about the immediate prospects for debt. It is not as if the possibility of helicopter money restricts the abilities of governments in any way.... [While] it is good that some people at the Bank are thinking about alternatives to QE, which is a lousy instrument.... It is a shame that the Bank is not even acknowledging that there is a straightforward and cost-free solution... Read MOAR

It disturbs me too.

One reason it disturbs me is that a version of "helicopter money" was one of the policy options that Milton Friedman and Jacob Viner endorsed as the right policies to deal with the last time we were at the zero lower bound, stock Great Depression. Back in 2009 I quoted Milton Friedman (1972), "Comments on the Critics of 'Milton Friedman's Monetary Framework'", quoting Jacob Viner (1933):

The simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks..

And Friedman continued:

[Abba] Lerner was trained at the London School of Economics [stock 1930s], where the dominant view was that the depression was an inevitable result of the prior [speculative] boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by "easy money" policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.... It was [this] London School (really Austrian) view that I referred to in my "Restatement" when I spoke of "the atrophied and rigid caricature [of the quantity theory] that is so frequently described by the proponents of the new income-expenditure approach and with some justice, to judge by much of the literature on policy that was spawned by the quantity theorists" (Friedman 1969, p. 51).

The intellectual climate at Chicago had been wholly different. My teachers... blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the need to let deflation and bankruptcy run their course, they issued repeated pronunciamentos calling for governmental action to stem the deflation-as J. Rennie Davis put it:

Frank H. Knight, Henry Simons, Jacob Viner, and their Chicago colleagues argued throughout the early 1930's for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times (Davis 1968, p. 476)... that the Federal Reserve banks systematically pursue open-market operations with the double aim of facilitating necessary government financing and increasing the liquidity of the banking structure (Wright 1932, p. 162)....

Keynes had nothing to offer those of us who had sat at the feet of Simons, Mints, Knight, and Viner. It was this view of the quantity theory that I referred to in my "Restatement" as "a more subtle and relevant version, one in which the quantity theory was connected and integrated with general price theory and became a flexible and sensitive tool for interpreting movements in aggregate economic activity and for developing relevant policy prescriptions" (Friedman 1969, p. 52). I do not claim that this more hopeful and "relevant" view was restricted to Chicago. The manifesto from which I have quoted the recommendation for open-market operations was issued at the Harris Foundation lectures held at the University of Chicago in January 1932 and was signed by twelve University of Chicago economists. But there were twelve other signers (including Irving Fisher of Yale, Alvin Hansen of Minnesota, and John H. Williams of Harvard) from nine other institutions'...

"Helicopter money"--increases in the money stock used not to buy back securities but instead to purchase assets that are very bad substitutes for cash like the consumption expenditures of households, roads and bridges, the human capital of 12-year-olds, and biomedical research--could be mentioned as a matter of course as a desirable policy for dealing with an economy at the zero lower bound by Jacob Viner in 1933. But, apparently, central banks do not even want to whisper about the possibility. One interpretation is that, confronted with Treasury departments backed by politicians and elected by voters that have a ferocious and senseless jones for austerity even though g > r, central banks fear that any additional public recognition by them that fiscal and monetary policy blur into each other may attract the Eye of Austerity and so limit their independence and freedom of action.

If I were on the Federal Reserve Board of Governors or in the Court of the Bank of England right now, I would be taking every step to draw the line between fiscal policy and monetary policy sharply, but I would draw it in the obvious place:

  • Contractionary fiscal policies seek to lower the government debt (but with g > r or even g near r and hysteresis actually raise the debt-to-GDP ratio and possibly the debt).
  • Expansionary fiscal policies seek to raise the government debt (but with g > r or even g near r and hysteresis actually lower the debt-to-GDP ratio and possibly the debt).
  • Policies that neither raise or lower the debt ain't fiscal policy, they are monetary policy.
  • Contractionary monetary policies reduce the money stock (and usually but do not have to raise the stock of government debt held by the private sector).
  • Expansionary monetary policies raise the money stock (and usually but do not have to lower the stock of government debt held by the private sector).

And if helicopter money leads Treasuries to protest that the money stock is growing too rapidly? (They cannot, after all, complain that the government debt stock is growing too rapidly because it isn't.) The response is: Who died and put you in charge of monetary inflation-control policy? That's not your business.