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Wednesday, June 8, 2016

Helicopter Money Is Just A Bureaucratic Power Grab

Even though helicopter money is an utterly pointless exercise, the idea simply refuses to go away. There are two reasons for its longevity: economists mysticism about "money," and the implication for the power of the central bank. The premise is that even though bureaucratic elites have mismanaged the economy in the past, by giving them more power, future outcomes will somehow be improved.

"Helicopter Ben" On "Helicopter Money"


Ben Bernanke (ex-Chairman of the Federal Reserve) discusses "helicopter money" in "What tools does the Fed have left? Part 3: Helicopter money."

Within the article, he runs through the story about helicopter money. He first explains why some deficient analytical frameworks find the idea attractive, then why helicopter money does not offer any new policy space. If you strip out the blah-blah-blah in his text, he says exactly what I wrote in my article linked above (even excluding some introductory quotations, it takes him 1174 words before he gets to the rather critical point that helicopter money will not work).

Ben Bernanke:
As my former Fed colleague Narayana Kocherlakota has pointed out, the fact that the Fed (and other central banks) routinely pay interest on reserves has implications for the implementation and potential effectiveness of helicopter money. A key presumption of MFFPs is that the financing of fiscal programs through money creation implies lower future tax burdens than financing through debt issuance. In the longer run and in more-normal circumstances, this is certainly true: The cost to the Treasury of spending increases or tax cuts – and thus the future tax burden – will be lower if the Fed provides the financing. In particular, when the Fed’s balance sheet has shrunk and reserves are scarce again, the Fed will be able to manage short-term rates without paying interest on reserves (as it did traditionally), or in any event by paying a lower rate on reserves than the Treasury must pay on government debt. In the near term, however, money creation would not reduce the government’s financing costs appreciably, since the interest rate the Fed pays on bank reserves is close to the rate on Treasury bills.
OK, so there is no way helicopter money can improve matters. However, that does not mean we abandon the idea. Instead, he floats a trial balloon (trial helicopter?):

Ben Bernanke:
However, let’s imagine that, when the MFFP is announced, the Fed also levies a new, permanent charge on banks [emphasis mine - BR]—not based on reserves held, but on something else, like total liabilities—sufficient to reclaim the extra interest payments associated with the extra $100 billion in reserves. In other words, the increase in interest paid by the Fed, $100 billion * IOR, is just offset by the new levy, leaving net payments to banks unchanged. (The aggregate levy would remain at $100 billion * IOR in subsequent periods, adjusting with changes in IOR.) Although the net income of banks would be unchanged, this device would make explicit and immediate the cheaper financing of the fiscal program associated with money creation.
So the logic runs as follows:
  1. There is little point in increasing government spending to stimulate the economy if taxes are raised to match the new spending. The net effect is only to increase the relative size of the government in the economy; the fiscal deficit would be unchanged. (Technically, that would only be a first order approximation of the net stimulus. The tax and the spending may have different "multipliers," and so there could be a net effect on the economy.)
  2. Instead, the government increases spending, and this will have the effect of raising debt and money issuance.
  3. Since most "money" issuance would likely end up as excess reserves, any liability issuance mix will increase consolidated government interest costs.
  4. To offset these interest costs, Ben Bernanke suggests giving the central bank new taxation powers.
I may just be an ignorant control systems Ph.D., but it seems that the logic above has some consistency  issues. In any event, the key point seems to be: even though helicopter money makes no economic sense, it might be a good idea as it gives the central bank more power (the ability to set taxes with minimal democratic oversight).

Simon Wren-Lewis: "Nice Government You Have There"

Professor Simon Wren-Lewis of Oxford also wades into this issue in "Money and Debt."

This article is a sterling example of why money needs to be abolished from economic theory.

Simon Wren-Lewis:
Money is not the government’s or central bank’s liability. (For a clear exposition, see another piece by Eric [Lonergan], or this by Buiter.)
This statement is obviously incorrect. From the Weekly Financial Statistics on the Bank of Canada's web site:


Remember that "helicopter money" cannot guarantee the creation of currency (notes and coins); the most likely outcome would be the creation of excess reserves -- which pay the same interest rate as Treasury bills. In other words, helicopter money will increase the amount of interest-bearing liabilities. One could argue based on linguistic grounds that certain interest-bearing liabilities are not "debt," but we cannot redefine accounting terminology to pretend that liabilities are somehow not "liabilities," even if "money" has "network effects." ("Network effects" apparently have the same relation to "money" as "eyeballs" had to "internet stocks" in the 1990s.)

However, the crux of Professor Wren-Lewis' argument is:
I think this all kind of misses the point. Base or high powered money (cash or reserves) is not the same as government debt, no matter however many times MMT followers claim the opposite. (For a simple account of why the tax argument is nonsense, see Eric Lonergan here.) Civil servants can frighten the life out of finance ministers by saying that they may no longer be able to finance the deficit or roll over debt because the market might stop buying, but they cannot do the same by saying no one will accept the money their central bank creates. 
In other words, the risk is that mutinous bureaucrats can threaten elected politicians with debt default if the politicians do not follow the policy preferences of the bureaucrats.

From a real-world perspective, this is an issue that always needs to be kept in mind. I touched on it in Section 6.6. of Understanding Government Finance ("Rollover Risk").
Finally, it should be noted that these mechanisms to prevent default assume that the central bank and the Treasury are looking to defend the national interest, and lean against any attempt by the private sector to force it into a default. It is entirely possible that these officials can be captured intellectually, and side with the market participants who believe that “market forces” should dictate fiscal policy. Nevertheless, the ability of these officials to force a default is limited, as the voters (and bondholders) would most likely crucify any political leader that allowed a default to occur.
I would suggest that the sensible solution to deal with out-of-control civil servants would be for the democratically elected government limiting the power of said civil servants, instead of increasing their scope for mischief.

To be clear, the ability of the central bank to set interest rates gives it more than enough power already, and I am not advocating stripping the bank of that ability (although I have no strong argument against doing so). Except in an emergency like wartime, there are reasonable arguments in favour of leaving interest rate policy in the hands of technocrats. If government fiscal policy threatens an inflationary outcome, the ability to raise rates should be enough to keep policy "sustainable." (Although one can debate the effect of interest rates on the economy, high interest rates are toxic for real estate. Given the over-representation of real estate interests in governments at all levels in the English speaking world, this is a powerful political lever.)

Creating a debate about interest rates and inflation is much more consistent with representative government than dropping hints about entirely arbitrary default risks. Furthermore, the bond market acts to limit the power of central bankers with respect to interest rates. If the set interest rates at a "too high" level, the bond market will price a reversal of the policy, reducing interest costs relative to the policy rate. However, if the central bank arbitrarily pushes the government into default, market forces can do little to stop the move.

Concluding Remarks

Although "Helicopter Money" debate is clouded in economist mysticism about money, the underlying debate revolves around the role of the technocrats in setting public policy.

(c) Brian Romanchuk 2016

24 comments:

  1. Brian, You seem to be writing from the perspective of money-is-a-liability.

    If instead, you wrote from the perspective of money-is-an-ASSET , I think the tone of your article would be drastically changed.

    Here is just one example: Government has no reason to worry about the cost of interest if government can always borrow the interest payment.

    How is the example related to money-is-an-ASSET? Interest cost are a problem if payment is expected in real assets, not money. Interest cost are no problem if the interest payment is made with the printing of more money.

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    1. It certainly is not an asset of the issuer. That would destroy the principles of double-entry accounting.

      I am open to the idea that money is not a "debt," and does not have to be repaid, etc. However, we cannot give up on accounting conventions just because money is allegedly special.

      "Liability" is an accounting term, which tells us where it shows up on the balance sheet. Money does not give you any voting rights in the "business," so it's not "common equity." It's on the right hand side of the balance sheet. By the process of elimination, it is a liability, unless you can somehow convince accountants that it is something like a preferred share.

      Within an economic model, it is nearly impossible to distinguish excess reserves and Treasury bills. This means that we have no hope of distinguishing the economic effect of "helicopter money" versus standard T-bill issuance.

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    2. Like you, I like to preserve the accounting rules. Thus, I easily see that money can be created when debt is incurred. Money in one column, debt in the other.

      Now assume for a moment that money-is-an-asset. It becomes ludicrous that a an entity could borrow from itself. Yet, this is exactly what is happening when government borrows from it's own central bank. We account by recording an exchange of liabilities, notes for bills (or any convenient description).

      The notes received by government are then traded to workers or otherwise used for the purposes of government. The notes become ASSETS in the hands of the receivers.

      Thus, liabilities have been converted into assets.

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    3. This comment has been removed by the author.

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    4. In general a financial instrument is recorded as a liability of the issuer and as a financial asset of the owner.

      Given that all financial instruments are assets of the owner and liabilities of the issuer then what distinguishes "money" from the other debt and equity instruments? The interest on debt? The dividends on equity? The floating versus fixed net asset value?

      During inflation investors do not want to hold "money" because it earns no interest and has fixed nominal net asset value. The financial intermediaries can "print money" during economic expansion because investors are circulating a small volume of "money" to generate a large and growing volume of "investments."

      During deflation investors want to hold "money" it has fixed (nominal) net asset value which is gaining in purchasing power while other floating NAV instruments are losing value. The financial intermediaries cannot "print money" when investors are trying to convert a large volume of investments into money.

      Money is the result of an effort by financial intermediaries to create a financial security system which preserves nominal net asset value during inflation or deflation. During deflation only the central bank and/or large government can provide this financial security system. The government must transfer spending power to the working class via taxes or borrowing to generate inflation if the investor class is unwinding the financial balance sheets driving deflation. Otherwise all it can do is swap floating NAV investments for nominal fixed NAV "money."

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    5. As Joe Leote wrote, money is an asset for the holder, but it also shows up on the right hand side of the balance sheet of the issuer. This is the same treatment as any other instrument. Only real assets can be on a balance sheet without appearing on the right hand side of an issuer, since there is no "issuer" associated with a real asset.

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  2. I think government always wants to be perceived as paying it's obligations with assets, assets which are usually 'money'. These assets (which government uses to pay the obligations of government) can be exchanged for any other asset in the economy, including real assets.

    Now if government borrows from itself (to obtain notes (which are money)), then I think we do have an "issuer" who is associated with a real asset. Government is that issuer of real assets.

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    1. If the consolidated government borrows from itself, the size of the assets and liabilities of the government will both go up by the same amount Since balance sheets balance, the implication is that other sectors of the economy have no change to their balance sheets.

      If money is going to be held by non-central government entities, there are four possibilities:
      (1) Money is a real asset, and there is no corresponding entry on the right hand side of someone else's balance sheet. This is exactly what happens for things like real estate, fixed assets, etc. This is largely untenable, since excess reserves are "money", and the government pays interest on them. Why would they pay interest on things that are not on their balance sheet?

      (2) The money is on the right hand side of the balance sheet of some entity that is not the government. Which one? Why is the government paying interest on someone else's balance sheet item?

      (3) The money appears on the right hand side of the government, but it is not classified as a liability. Well, what is it then?

      (4) The money appears on the right hand side of the governmental balance sheet, and it is a liability (which is the standard accounting treatment).

      This all follows from the standard accounting logic, and has nothing to do with how money is used within the economy.

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    2. The consolidated central bank and central government balance sheet should have two kinds of assets and three kinds of liabilities recognized as follows:

      K = nonfinancial assets
      F = financial assets
      M = high powered money (central bank liabilities)
      T = time deposits (central bank liabilities)
      B = government securities (government liabilities)

      NW = K + F - M - T - B

      The net worth of the consolidated government becomes negative when the Congress (legislature) authorizes deficit spending programs such that M + T + B > K + F. However the valuation of central government assets is difficult to determine and the liabilities are default-free unless the Legislature decides to default for political reasons. So the net worth of the government is not as meaningful as for some other unit in the economy.

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  3. "If money is going to be held by non-central government entities, there are four possibilities:
    (1) Money is a real asset, ..... This is largely untenable, since excess reserves are "money",..............."

    I don't think I follow your logic when you reject possibility NR 1. What does reserves have to do with how the receivers-of-government-money treat their assets?

    On possibilities 3,4, and 5, it seems to me that Joe has a reasonable description of the combined net worth. However, if we reduced the combination to a single balance sheet (combining CB and government) money should appear on the left side of the balance sheet and be available for use in meeting the obligations of government. The right side of the balance sheet should detail all the liabilities incurred by government in accumulating the money asset.

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    1. It's always an asset for the holder. The only question is about the balance sheet of the issuer.

      In case (1), there is no corresponding entry for the issuer. This is how real assets, like land, or automobiles are treated. If an auto dealer sells a vehicle to another company for cash without a warranty, the vehicle is only on the balance sheet of the purchaser as an asset, and the seller has no further linkage to the vehicle. So the accounting makes sense.

      If we used gold in the form of bars without any stamps attesting to quality as money, it would only appear on the balance sheets of the holders, which is the same treatment as a real asset. (For gold coins, the issuer has at least a contingent liability to address a shortfall in the gold content of the coin.)

      The government has an ongoing obligation to accept currency in payment of tax, or to accept currency in exchange for reservs, and to pay interest on excess reserves. These ongoing obligations imply that the money has to appear on the right hand side of the consolidated government. Whether it is the Treasury or the central bank might depend upon accounting shenanigans, but that has no effect on the consolidated government.

      Excess reserves are a deposit at the central bank. It cannot appear on the left hand side of its balance sheet.

      I will be writing an article on banking system balance sheets in the coming weeks. It may be helpful to clear some of this up.

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    2. When the government pays for something with money, it does not need to transfer something for an existing asset. It just grows its balance sheet. It gets the new asset (what it bought), and creates a new liability (the money).

      This is exactly what happens in the private sector when a firm purchases an asset on credit; it gets an asset, and its "accounts payable" increase. It did not need a pre-existing asset to pay for the purchase.

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    3. Thank you for your carefully considered reply and expanded comments. I welcome this discussion as a step forward in my own understanding of money.

      I haven't thought this next idea through (yet), but it still relates here: Assume government borrows from itself (the combined CB and government). I am next thinking about the grand combination of the government and private sector balance sheets. That grand-combined-balance-sheet should increase by a two:one rate where the single new dollar is the one (This would be after the self-borrowed money is spent into the economy).

      Like I said, I have not thought this through on an accounting sheet framework. Maybe a subject for future thought.

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    4. If you consolidate everybody's balance sheet, you just get real assets on the left hand side, and "equity" on the right. Everything else cancels out.

      This is where people could argue that my assertion about "point (1)" is wrong. Gold coins would show up as a real asset, on the ultra-consolidated balance sheet. Society can take the gold from the coins to make jewelry for various rap artists. Since fiat money has "network effects", why do not treat fiat money in the same way as gold coins?

      I think this argument can be shot down, at least on the basis that the carrying value of these "network effects" may bear no resemblance to the amount of money in circulation.

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    5. Brian,

      You ask “why do not treat fiat money in the same way as gold coins?” Good question: my answer is that they’re effectively the same because they are both private sector assets. Increase private sector liquid assets, and private sector spending will rise.

      Your answer to that is that “fiat money has network effects” and that “the carrying value of these "network effects" may bear no resemblance to the amount of money in circulation.”

      Far as I’m concerned that’s meaningless. But still, if you can explain your point there, I’m happy to consider it.

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    6. Gold coins are a real asset because they are made of gold. They are not considered to be a liability, although they represent a contingent liability to the issuer - if the coin does not have the gold content the mint claims it does, the buyer presumably has legal redress. In any event, gold coins remain as assets if we consolidate all economic entities.

      This is ino contrast to debts. In a consolidation, debts and other liabilities get netted out and disappear. I would argue that fiat money should be treated the same way. (I am ignoring the scrap value of notes and coins, which bears no resemblance to face value.)

      A deposit at the central bank is a claim on the central bank. If we consolidate the claimant and the central bank, the deposit pretty much has to be netted to zero. Meanwhile, paper money is just a deposit at the central bank in bearer form, and should get treated the same way.

      However, one theory I have seen says that money is valuable because of "network effects" (the Wren-Lewis article refers to this in passing). It is possible that these "network effects" are valuable, and so would survive consolidation as an asset for "society".

      However, even if we grant that it is reasonable to capitalise this intangible asset, what value do we put on it? There is no reason to believe that its value resembles the face value of the money stock. For example, the Weimar Republic had literally wheelbarrows full of "network effects," but most people would not have put much value on them.



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    7. Clearly base money is a liability of the central bank or the state in the strict book-keeping sense. However, it’s a strange sort of liability, if indeed it is a liability at all. Reason is that the state has the right to grab any amount of base money off the private sector via tax. That’s the equivalent of me being able to raid the bank that granted me my mortgage, and grab wads of £10 notes so as to pay off the mortgage. Would I then really be in debt to the bank?

      As Warren Mosler put it, base money should be regarded as being similar to points awarded by a tennis umpire: they’re an asset as viewed by players, but not a liability far as the umpire is concerned.

      But much more important than the latter theoretical points is the question as to the ACTUAL effect of having the state print money and distribute it to households, government departments or whoever. And there’s no question but that spending would rise, as long as the population has faith that the state won’t issue LUDICROUS amounts of money and cause hyperinflation. Ergo helicopter money works, far as I can see.

      Re network effects, I’m still not much the wiser. I can see that fiat money has value partially because it is introduced to an organised and well run country rather than a country where anarchy reigned, (if that’s what’s meant by “network effects”). On the other hand gold would have limited value given anarchy: about the only thing with real value might be food.

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    8. Sure, the consolidated government cannot run out of base money. But it sitting on the balance sheet, and we have to classify it. Creating a brand new high level accounting classification for money - when we just find out that it acts like any other liability from an accounting sense - is silly.

      Helicopter money works in exactly the same way as fiscal policy, as that is what it is. It provides no new policy space, which is why it is a pointless exercise. Furthermore, it is being exercised without democratic oversight.

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    9. One can write the consolidated govt position as follows:

      K + F = M + T + B + NW

      Assets (K + F) = Liabilities (M + T + B) + Equity (NW)

      Gold hoard at central bank and Treasury would be held in nonfinancial assets K.

      There are two issues with regard to consolidated government liabilities. First, regardless of government net worth the liabilities are treated like insured deposits by the other sectors of the economy. Second, if the consolidated government net worth becomes negative it is creating net financial assets for the other sectors. In reality the U.S. Treasury has many off-balance sheet liabilities so it is really insuring "money" and "debt" in greater volume then appears on the books.

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  4. "I may just be an ignorant control systems Ph.D."

    Please Brian that makes you the most competent of anybody out there looking at this...

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  5. 'Professor Simon Wren-Lewis of Oxford also wades into this issue in "Money and Debt."'

    Apologies for the ad-hominem, but imho Professor Simon Wren-Lewis of Oxford is a prime example of the fact that "it is difficult to get a man to understand something when he lacks the intellectual capacity to understand it".

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  6. Scott Fullwiler discusses this: http://neweconomicperspectives.org/2015/06/what-is-helicopter-money-anyway.html

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  7. http://noahpinionblog.blogspot.com/search?q=bestiary

    I think the Modern Monetary Theory entry applies to the extremely "relevant" exposition of accounting prowess demonstrated by the commenters above. You guys leaning into the author might want to enquire into effects rather than definitions. Work patiently through the sequence of events involved in what you consider a helicopter drop, rather than show off your ability to read a dictionary.

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    1. I don't know what is meant by the phrase "helicopter drop" since it seems to be used in different ways by different authors. Accounting customs are relevant to any discussion of the modern credit system yet the effects or outcomes are not evident from accounting identities and mechanics. One needs to have a theory beyond the identities to discuss effects or "outcomes." In general if bank and non-bank units in the market sector of the economy do not want to hold money they attempt to convert this to investments (financial assets) that earn interest or some other return on investment. I am not sure what that implies for the concept of "helicopter money" since the effects depends on prevailing economic conditions and the accounting mechanics for injecting helicopter money and the reaction of markets based on a behavioral theory or model.

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