REAL MONEY - matters
In a recent speech described by Anatole Kaletsky as a “breakthrough” and “truly historic”, Adair Turner advocated a helicopter drop: that’s where the government / central bank machine just creates new money and spends it into the economy as and when needed (and/or cuts taxes). (watch the speech here)
Now where have we heard that idea before? Ah yes: Positive Money literature. (*It should not be taken that Positive Money agrees with all of what Turner is saying, though.)
In fact the idea is an old one: it was being advocated best part of a century ago: Adair Turner rightly refers to Milton Friedman’s advocacy of the idea in a paper in 1948 (see p.250 here). However, the idea goes back further than that: Keynes advocated the idea in a letter to Roosevelt in 1933. (See 5th paragraph here.)
We’ve actually been helicoptering in the last few years
Turner’s helicopter idea is doubly unoriginal because we have actually been helicoptering in the UK, US and elsewhere over the last two or three years. But few people have noticed. I’ll explain.
If government implements fiscal stimulus (i.e. borrows and spends money into the economy) and the central bank then prints money and buys back government debt, that all comes to the same thing as the government and central bank (viewed as a single unit) simply printing money and spending it into the economy. Indeed, Simon Wren-Lewis (Oxford economics prof.) made that point recently.
So the important question is not: “should we print money and spend it?” The real or fundamental question is this:
Given a need for stimulus, should we print and spend, or does it sometimes make sense to split money printing into two parts, fiscal policy and monetary policy?
The answer given in the submission to Vickers made by Positive Money, Richard Werner and the New Economics Foundation is that the “split” makes little sense: in particular, the submission argued that one of the main monetary planks, interest rate adjustment, is defective.
Personally, I’d put it more strongly: I’d describe the “split” is ridiculous. I can think of a dozen reasons. Here are half a dozen.
1. Re interest rate adjustments, here is no relationship between central bank base rate adjustments and the rates charged by credit card operators.
2. The rates charged by commercial banks are slow to respond to changes in central bank base rates.
3. The purpose of fiscal policy (i.e. “borrow and spend”) is to bring stimulus. Now the “spend” part of that is certainly stimulatory. But the “borrow” part has the OPPOSITE EFFECT: its effect is deflationary. All in all, borrow and spend is a bit like throwing dirt over your car before washing it.
4. To put the latter point in more conventional language or economics jargon, the fact of government borrowing raises interest rates which discourages other forms of borrowing (often called “crowding out”). If the crowding out is 100%, then fiscal policy is totally ineffective. However while the consensus is that crowding out is nowhere near 100%, there is little agreement on how big the crowding out problem actually is. All of which makes a bit of a nonsense of fiscal policy.
5. Radcliffe Report on monetary policy published in 1960 concluded that ‘there can be no reliance on interest rate policy as a major short-term stabiliser of demand’.
6. The idea that there is a close relationship between interest rates and the ACTUAL availability of credit has been shown to be TOTAL NONSENSE over the last two years. That is, rates are currently at record low levels, but banks are reluctant to lend.
Reversing money printing
One potential problem with money printing is that it might be politically difficult to reverse, should the need arise. (“Reversal” consists of raising taxes and “unprinting” the money collected.) But if there is a problem there, it’s not immediately obvious why the two constituent parts of money printing (fiscal and monetary measures) should be any EASIER to reverse.
For example (and taking fiscal policy) if a government borrows, some of the money comes from abroad which means an initial standard of living boost as compared to where the money is raised just from domestic sources. And that boost is reversed when foreigners are repaid. (The effect is the same as where a household gets a temporary standard of living boost by running up debt owed to an external source, e.g. when the household runs up credit card debt. The household then suffers a standard of living hit when it abstains from consumption and repays the debt.)
In fact there is LESS OF A PROBLEM with a “money printing reversal” than with fiscal boost reversal in that there is NO STANDARD OF LIVING HIT when money printing is reversed. Reason is that the SOLE PURPOSE of a “money printing reversal” is to thwart excess inflation. And inflation depresses living standards. In other words (strange as this might sound) raising taxes as part of a money printing reversal simply obviates the standard of living hit that would come from excess inflation.
But that is a complicated issue, as readers will gathered. The issue cannot really be addressed in less that a couple of thousand words, and there is not room for that here. But hopefully introducing the issue will get a few peoples’ brain cells working: that cannot do any harm!