Learn first, then teach
Professors Stephen Cecchetti and Kermit Schoenholtz are the latest to opine on the subject of helicopter money. It is worth quoting from their opening paragraphs, it frees me up to respond quite bluntly:
“We are wary of joining the cacophony of commentators on helicopter money, but our sense is that the discussion could use a bit of structure. So, as textbook authors, we aim to provide some pedagogy.”
I wish they had heeded their wariness – they give textbook authors a bad name.
To provide some structure to future discussions, I will set out eight of the pitfalls many economists make in initially considering helicopter money. Cecchetti & Schoenholtz are no exceptions – they fall for all eight.
1. They don’t define ‘helicopter money’ (on this occasion a trip to wikipedia will suffice). The closest Cecchetti & Schoenholtz come to doing so, around halfway through the article, is to assume what they set out to prove: “As we understand it, helicopter money is a fiscal expansion that is financed by central bank money rather than by bonds”. Oh, I guess it is fiscal then.
2. They don’t outline a clear distinction between fiscal and monetary policy (it’s not self-evident!).
3. They observe that helicopter money is just like ‘combining bond-financed fiscal expansion with … QE’. No one that I am aware of who has thought for long about helicopter money thinks that, subject to certain conditions, it is not economically equivalent to QE combined with tax cuts. That is the start of an interesting conversation, not the conclusion.
4. When they analyse central banks balance sheets, economists become second-rate accountants, and accountants become … actually, it totally depends on the accountant. Suffice it to say, the IOR is not really an interest rate, bank reserves are not liabilities at book value, tiered reserves are a game-changer, and QE with expected losses is not fundamentally distinct to lending to banks at interest rates below the IOR.
5. They think that because reserves pay IOR in certain jurisdictions this means a fundamental tenet of economics – that money is different to debt – is no longer the case. This is an analytical error. The IOR does not fundamentally change the nature of money. Money is not debt, which is why we have monetary policy and independent central banks.
6. They ignore crucial legal and institutional distinctions. When it comes to helicopter money, the Fed, the ECB, the Bank of England, and the Bank of Japan all face very different sets of institutional requirements and constraints. In the Eurozone, the legal and institutional case for helicopter money appears strongest.
8. They haven’t read these articles (below) which are essential reading, and have typically pre-empted, and refuted, what they are about to assert as clarification.
By falling for each of these eight pitfalls, Cecchetti & Schoenholtz, have, in their own way, made a pedagogic contribution.
Milton Friedman AER 1968 Presidential address Cecchetti & Schoenholtz also make the very common mistake of focusing on Friedman’s Optimum Quantity of Money paper, where he introduces the analogy of helicopters dropping dollar bills, but is not discussing monetary policy in a ‘liquidity trap’. The more relevant Friedman article is his AER presidential address, which in fact discusses what to do when rates can go no lower and QE is redundant. I have discussed Friedman’s arguments here.
Paul Krugman Helicopters dont help
My reply A brief reply to Paul Krugman on policy equivalence
Nick Rowe Helicopter money is permanent
Martin Sandbu Monetary helicopters hover back into view
Martin Sandbu Helicopter money: if not now, when?
Adair Turner Demystifying monetary finance
Simon Wren-Lewis Money and Debt
Simon Wren-Lewis Helicopter money and fiscal policy
Earlier posts from this site that are also pertinent:
Legal helicopter drops in the Eurozone
Does the central bank’s balance sheet matter?
Accounting as religion
The economics of language
There are two types of negative interest rates
Finally, I should say that all these observations have been sharpened by Twitter (and non-Twitter) exchanges with Simon Wren-Lewis, Martin Sandbu, Mark Blyth, Brad DeLong, Martin Wolf, Nick Rowe, JP Koning, Toby Nangle, Willem Buiter, Markus Demary, Narayana Kocherlakota, Tony Yates, Dario Perkins, Matthew Klein, Richard Baldwin and many others. All errors are mine.