By Scott Fullwiler
Clive Crook has an interesting article in Bloomberg that I wanted to quickly touch on as it relates to a number of things that have been central to MMT for years. Crook’s piece does a good job discussing the current realities of the macroeconomic policy mix in the next recession; it also provides a clear example for illustrating differences between MMT and most other economists with regard to how they view the macroeconomic policy mix.
Crook points out that so-called “unconventional” monetary policy operations aren’t unconventional anymore. We’ve had nearly 7 years of ZIRP and various forms of QE in the US alone, not to mention about 17 years in Japan. According to most, thanks to monetary policy, “The world avoided another Great Depression. Yet even in the U.S., this is a seriously sub-par recovery; growth in Europe and Japan has been worse still.” Worse still, Crook says, “Now imagine a big new financial shock. It’s quite possible that all three economies would fall back into recession. What then?”
I’d say a global recession in that case is highly probable, in fact, not just possible. The most recent recovery and current expansion, weak as they’ve been, are now ending their 6th year and starting their 7th, about the average length of postwar expansions. And we’ve already seen that real GDP apparently declined in the first quarter of this year, while Randy Wray and Steve Keen have been warning that private debt levels are rising to dangerous levels. So, yes—what then?
Crook notes that the “obvious answer” is fiscal policy, but adds there are obvious political difficulties with more debt (and he appears to also recognize at least to some degree that these concerns in the case of the US, UK, Japan, and other currency issuers are not warranted). Very true.
Unfortunately, the public at large doesn’t realize that the vast majority of run up in debt has been due to the automatic stabilizers of fiscal policy that place a floor under the economy rather than actual active use of fiscal policy to stimulate. In the US case, the Obama stimulus of 2009-2011 was about $800 billion while total deficits since 2009 totaled more than $5.6 trillion. In other countries, the balance is probably even more toward automatic stabilizers than that. (Note that the current deficit in the UK is about twice that in the US as a percent of GDP, even as the former actively tried to reduce deficits after the recession—as MMT’ers have noted, the budget deficit is a result of the economy as much as it is a cause.)
This is where Crook discusses “a new kind of unconventional monetary policy—helicopter money,” which many are calling for now, as the better solution. Crook’s definition of helicopter money is this: “If central banks need to expand demand — and interest rates can’t be cut any further — let them send a check to every citizen. Much of this money would be spent, boosting demand . . . . Nobody, so far as I’m aware, is arguing that it wouldn’t be effective.”
I completely agree that sending “a check to every citizen” could be effective. But the reason I think so is because helicopter money is in fact a fiscal operation, as I explained back in early 2010.
This brings me to the key point I want to make in this post—I find it completely counterproductive to have a theory of macroeconomics in which we define fiscal policy and monetary policy based on who is acting. If the US Congress and Treasury choose to send $1 trillion to households without raising taxes, it’s called fiscal policy. But if the Fed does the exact same thing, it’s apparently called monetary policy. I think this only confuses our understanding of the macroeconomic policy mix and makes it more difficult to have an economics profession that can give good policy advice.
Many will object to my labeling of helicopter drops as fiscal policy because a helicopter drop is not accompanied by bond sales. Really? Apparently these people haven’t noticed that the Fed is carrying out reverse repurchase operations, and plans to expand their use multiple fold when it raises its interest rate target in order to put a floor on how far the fed funds rate can fall. In other words, the Fed is going to be selling securities in order to keep the federal funds rate from falling once it raises rates above 0. So, if the Fed were to carry out helicopter drops as Crook and others suggest to create “QE for everyone,” it would have to sell securities or the interest rate would fall back to zero. Also, it’s quite clear that these security sales would not be “financing” operations, as the Fed just “prints” the “money.”
And what does it look like if instead we have Congress/President doing the spending? Well, they spend money and sell securities, too. But in that case, people say the security sales are financing the spending. And in their minds this is fiscal policy, while the Fed’s helicopter money is monetary policy.
Why do they make this distinction? Perhaps it’s because of the law that requires the Fed to not “lend” directly to the US Treasury, so that the Treasury can’t spend unless it has a positive balance in its account at the Fed. I find that weird—the government writes a law forbidding itself from requiring one of its own agencies to provide it with an intergovernmental loan (which is itself very weird), and apparently that makes fiscal policy about “borrowing” money while monetary policy is about “printing” money, even as both of them are spending and selling securities.
And note what would happen if the Fed was instead required to provide that loan to the Treasury—as it has been required to do at times in the past—if the Fed wanted to raise rates, in the absence of the Treasury selling securities, the Fed would have to. But, again, economists want us to believe the Fed selling securities in this case is monetary policy to support an interest rate target while the Treasury selling securities is fiscal policy to finance its spending.
In fairness, Crook, like many, calls helicopter money a “hybrid” of monetary and fiscal policies. But I think this again confuses things.
It seems much clearer to simply say that (a) the act of creating a deficit—raising the net financial wealth of the non-government sector—is fiscal policy, and (b) the act of announcing and then supporting an interest rate target with security sales (or purchases, or interest on reserves)—which has no effect on the net financial wealth of the non-government sector—is monetary policy. In the case of (a), whether the Treasury or the Fed cuts the checks, it’s fiscal policy, and with (b), whether the Treasury or the Fed sells securities, it’s monetary policy.
In other words, fiscal policy is about managing the net financial assets of the non-government sector relative to the state of the economy, and monetary policy is about managing interest rates (and through it, to the best of its abilities, bank lending and deposit creation) relative to the state of the economy. This is in fact how Randy Wray explained both in his 1998 book; it’s also how Warren Mosler explained them in his 1996 paper. That is, from the beginning, MMT has labeled monetary and fiscal policies by their functions, not by who was doing what.
I think this is a much more useful taxonomy because it makes clear from the start that (1) the currency-issuing government isn’t constrained while (2) the interest rate on the national debt is a policy variable. All kinds of human suffering the past 6+ years may have been avoided if those two basic points were widely understood.
I want to bring the above to bear on the following quote from Crook’s piece, which is also representative of the views of many economists:
One concern is that if a central bank starts giving out money, it will create liabilities with no corresponding assets — thus depleting its equity. Compare with QE: This also creates liabilities in the form of money, but the central bank gets assets (the securities it buys) in return.
Does it matter that the central bank’s equity is reduced? No. Standard accounting terms lose their usual meanings when applied to central banks. Money isn’t a liability in the ordinary sense. Nobody is owed and nothing ever has to be paid back.
First, I want to congratulate Crook on recognizing the accounting difference between QE and actual spending—this in fact is not well understood, and he nails it. However, consider the following adjustment to his passage (I’ve deleted the QE reference, which is a separate point):
One concern is that if a GOVERNMENT starts giving out money, it will create liabilities with no corresponding assets — thus depleting its equity.
Does it matter that the GOVERNMENT’s equity is reduced? No. Standard accounting terms lose their usual meanings when applied to GOVERNMENTS. Money isn’t a liability in the ordinary sense. Nobody is owed and nothing ever has to be paid back.
In fact, all the accounting points he makes about the central bank’s helicopter money are also true for government deficits resulting from the same size transfer payments to the private sector. Again, though, for the economics profession, when the Fed does it, it’s monetary policy and they recognize quickly that “money isn’t a liability in the ordinary sense”; but were the government to do it, it would be fiscal policy and “Oh, no! We’re living beyond our means! The government will go bankrupt! The bond vigilantes are coming to destroy our economy!”
This is all not to mention that for the US and many other countries—not the nations of the EMU, though—the central bank is an agency of the federal government, and its debt should technically be considered the government’s debt.
It’s also not to mention the little technical detail about the laws that governments write to establish central banks, which spell out what the central banks can and cannot do. As it turns out, for the Fed, helicopter money as Crook and others describe is not legal. Unlike the US government’s law forbidding it from receiving direct loans from the Fed, this is not a self-imposed constraint—it’s not the Fed’s choice whether or not it has the legal authority to carry out helicopter money spending. And it currently does not.
So, again, note how odd economists are: The government’s deficit spending is called fiscal policy, and it is seen as bringing with it the potential for bankruptcy, rising interest rates if markets lose “confidence” in the government’s ability to pay back its debt, and so on. But the central bank’s helicopter money spending is (mostly) called monetary policy, and it’s quite clear that this brings no risk of bankruptcy—since money is “no ordinary liability”—and interest rates on its liabilities are not subject to the market’s “confidence.”
And this is all believed to be true even given that the accounting entries for the two types of spending are identical, the central bank is (in most cases) an agency of the government established by laws written by the government, and the government has the express authority to tell the central bank if it can even carry out helicopter money spending in the first place.