Nick Rowe and his colleagues in Canada have a superb blog. If you’re interested in economics and don’t already follow it – take a look.
Recently, Nick and I have been discussing the relevance of ‘permanence’ to helicopter drops. In some ways our positions reflect polar opposites. Nick defines a helicopter drop as a permanent increase in base money. I think applying the term ‘permanent’ to a helicopter drop is meaningless. I don’t buy the analogy with tax cuts. I define helicopter drops as transfers to the private sector financed with base money. Period.
Ironically, I think Nick and I agree on the substantive point. My interpretation of what Nick is saying is that in order for a cash transfer from a central bank to households to be a genuine policy innovation it cannot be a loan. In this sense, he is arguing that a transfer payment financed by bond issuance is a loan, because at some point taxes will have to be raised to repay the bonds.
To this extent – and perhaps this is all that matters – we are in agreement. I think cash transfers to households are not loans, or if they are to be structured as loans they should be perpetuals which are never repaid – which would be legal in the Eurozone. So we both agree that helicopter drops are transfers to households which are never ‘repaid’. I put ‘repay’ in inverted commas, because it is not at all clear to me what ‘repay’ means in this context.
Part of where I think I diverge with Nick is over how people think. I’m an economist, and I simply don’t have any relevant expectations regarding the future path of the monetary base. Nor would my expectations change if I got a cheque from the Bank of England. Nor do I think I can extrapolate from changes in the monetary base to my personal economic circumstances. In this regard, I think I am a ‘representative agent’.
As an economist, I am also reasonably certain that a 2-5% of GDP cash transfer from the ECB to Eurozone citizens over 12 months would raise nominal spending and has a very good chance of shifting the Eurozone to a better, higher growth, equilibrium. And I simply don’t think that expectations about the monetary base or inflation are particularly relevant to this. I do think it would be a positive shock to real growth expectations.
I could leave it there, but unfortunately framing matters a great deal in economics and economic policy. And I think framing helicopter drops as ‘permanent’ is profoundly unhelpful – it is analytically unnecessary (even if defined in an internally consistent way, which I have yet to see), and practically confusing.
This selection from my exchange with Nick on his blog may help:
First Nick’s definition of a helicopter drop:
“Consider two policies:
A. I print $100 and give you $100. Period.
B. I print $100, and give you $100, and at the same time tell you (lead you to expect) that I will take $100 away from you next year, and burn it.
A is an outright gift of newly-printed money. It is helicopter money.
B is not a gift. B is an interest-free loan. The fact that you do not give me an IOU is irrelevant. The fact that I do not buy your IOU is irrelevant. If I know where to find you, and have no problems remembering that I lent you $100, and have no problems forcing you to pay me $100, I do not need little bits of paper with “IOU” written on them to help jog my memory and help me get the $100 back through the courts. But it is exactly as if I printed $100 and bought your one-year IOU for $100 with it. Or bought an IOU from you that someone else had signed. And bonds are IOUs.
B is an Open Market Operation, in which I print $100, buy $100 worth of bonds from you, and reverse that operation one year later. B is not Helicopter Money.”
EL: Nick – Let’s consider two regimes – (1) a depression, and, (2) steady growth at full employment. The ‘equilibrium’ stock of base money is much higher in the depression. Assume we are currently in regime (1) (or the Eurozone!), and the central bank says that it will print money and transfer it to households until it succeeds in shifting the economy to regime (2).
The central bank is also committed to bringing base money back to equilibrium – which really means it will be a permanent expansion if you stay in depression and a permanent reduction if you return to growth.
Given that this (probably) describes reality your permanent helicopter drop is only possible if it fails.
That doesn’t seem satisfactory.
So the answer must be as follows: a heli drop does not need to be permanent in order to work because in a depression people in receipt of cash payments really don’t care if they will be symmetrically taxed in a future boom. In fact, they would be quite happy with that.
NR: Eric: Helicopter Money only needs to be “permanent” *relative to the time-path the stock of base money would have followed otherwise*. It doesn’t matter if it’s permanent relative to where the current stock is now.
If it’s permanent in my sense, it has no debt or future tax implications.
Now, you might say that helicopter money in my sense is not needed, and that a temporary bond-financed transfer payment can do the job that’s needed, because people are borrowing-constrained for example. But that’s a different argument.
EL: Nick, in the example I have given, the stock of base money is lower than it would have been if the central bank had not pursued the helicopter drop.
We may be talking at cross-purposes here – you might have to be clearer about what exactly you mean by “relative to the time-path the stock of base money would have followed otherwise”. For example, the macro effects of a helicopter drop might raise the ‘equilibrium’ level of base money for very different reasons. So, for example, the stock of base money might be higher than it would have otherwise have been, but inflation lower, would this still be ‘permanent’ in your thinking? Or is ‘permanent’ fully defined by the intentions of the central bank and beliefs of the households? (If you define ‘permanent’ as ‘not expected by households to have any future tax implications’ – even if it does – I’d be fine with that.)
Part of my argument is undoubtedly due to uncertainty. We have *no* idea what “the time-path the of stock base money would have followed otherwise”, we don’t know what the impact of the helicopter drop is on the equilibrium amount of base money, and there are so many levers to affect demand for base money. Also, if the change in the stock of base money is not ‘permanent’ is it possible for the transfer to be ‘permanent’ if it has no future tax implications (or if the implications are lower future taxes).
So let’s say we cannot determine whether or not a cash transfer is ‘permanent’ – I can’t determine it, because I am not sure what you mean, and you can’t determine it because even though you know what it means, you can’t measure it. Do you think it makes any difference to the effect a cash transfer from the central bank to households would have?
Is it any different to a cash transfer by the government financed by debt which is bought by a central bank under a QE programme subject to an inflation target? It shouldn’t be … but framing seems to matter way more than logic when it comes to the national balance sheet, so in practice, ‘yes, it is’.
EL: I would also be interested to get your thoughts on the ‘contingent reversal’. There is surely a difference between being given $100 in one period, and having it taken back in the next, and being given $100 and having it taken back if your circumstances significantly improve.
NR: The clearest thought-experiment is the one I did in my old post, where there is a finite horizon, and all the money is redeemed in the year 2525 (remember that old song?).
Not sure if that helps.
But the current effects depend only on how it affects people’s current expectations of the future, not on what will actually happen in the future. If it is *perceived* as permanent then it is permanent.
The future affects the present only via people’s expectations of the future.
The contingent reversal is interesting. It is precisely those contingent policies that let central banks target things like inflation, the price level, NGDP.
NR: BTW: I do not know the time-path X(t). And I do not know the time-path X(t)+$100. But I do know that X(t)+$100 will be permanently higher than X(t).
EL: “The future affects the present only via people’s expectations of the future” – that is a very nice way of putting it. And that is really my point, I don’t think anyone in receipt of a check from the central bank would materially change their expectations of how this might change their future circumstances. If they were rational, empirically literate economists, they would expect the future to be brighter – that’s what all the evidence suggests. Beyond that, they have no relevant expectation – nor would they if the central bank said the change in monetary base was ‘permanent’. Identifying the extreme contingency of the relevant factors surrounding the future path of the monetary base – not to mention its impact on an individual’s circumstances – is another way of saying we have no relevant expectations in this regard.
Of course, the other way to square this circle is to say that individuals in receipt of check from the central bank will act as if it is ‘permanent’ having not really given it any thought … but I think we may be doing them a disservice!