It’s All About the Benjamins

You have to be careful when reading Tyler Cowen’s posts.  Whereas I can ramble on and on saying very little, he condenses a lot of ideas into very short posts.  When I first glanced at this post two things stuck out; Tyler didn’t understand the “helicopter drop of cash” and he confused me with Milton Friedman.  On closer examination he does understand the helicopter drop, and I have no complaint if people start associating me with ideas that Friedman actually developed.  In fact there is a long tradition of this in economics, recall the “Phillips Curve” was actually first popularized by Irving Fisher.  Here’s what Tyler has to say:

$250 for each senior or $13 billion in total.  It’s bad precedent to go around a COLA calculation, even on a one-time basis, but you can construct a partial defense of the policy (here is Matt’s semi-defense).  Think of it as a helicopter drop of money, a’la Scott Sumner.  If the helicopter drop substitutes for (part of) a second fiscal stimulus, that’s a net gain.  .  .  .   How will the expenditure be financed?  Obama was vague on that, but as usual the Fed moves both first and last in the monetary policy game.  All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been, wink and nod to Ben B., and it is all (or mostly) for the better.

My first thought was that Tyler was confusing fiscal and monetary policy.  The $13 billion would not directly impact the money supply.  But in the final sentence he alludes to his assumption—a larger fiscal stimulus would lead the Fed to adopt a more accommodative monetary stance.  This raises two questions; precisely what would the Fed have to do to turn it into a helicopter drop, and how plausible is this assumption?

The first question is easy to answer; they’d have to permanently increase the monetary base by $13 billion, relative to the trajectory they had planned before the fiscal authorities came up with this bright idea.  At first glance that might look reasonable, after all, didn’t Congress just pass a $800 billion dollar fiscal stimulus, and didn’t the Fed also increase the monetary base by roughly $800 billion?  Surely that can’t be coincidence?  In fact it is.  The monetary injection did not constitute “monetizing the debt,” and for two different reasons.  First, the Fed made it clear that the injection was merely temporary.   They repeatedly asserted that the money would be withdrawn from circulation before inflation became a problem.  And just to make sure, they paid banks to lock up the full $800 billion in excess reserves.

But what about additional fiscal stimulus?  How would the Fed respond?  I suppose anything is possible.  Tyler argues for accommodation; that fiscal stimulus would lead to a more expansionary monetary policy.  I seem to recall Krugman arguing that it would have no effect.  I think the most likely scenario is that monetary policy would roughly sterilize fiscal stimulus.  The Fed has some sort of policy goals, or at least some minimum level of aggregate demand that they find acceptable.  If fiscal stimulus doesn’t get us there, the Fed would be more aggressive.  If fiscal stimulus does boost AD, then the Fed would be less aggressive.  I make no claim that there is anything like a precise offset, although I have suggested that the “multiplier” might well be negative under some fairly plausible assumptions.  But I don’t see the “helicopter drop” assumption of a positive correlation to be very likely.  Indeed it also goes against statements by Fed officials.

Tyler’s post also makes a few other interesting points.  He’s right that the “one-time” violation of the COLA formula sets a bad precedent.  How many “one time” tax amnesties have we had?  But the Matt Yglesia post he links to also has a reasonable “semi-defense” of the move as a second best policy which heads off something worse.  The Yglesia article is also interesting for another reason; if Matt Yglesia is right, then this particular fiscal policy is a textbook example of ”money illusion.”  Almost every press story on the COLA treats the lack of a COLA adjustment as a bad thing for seniors, whereas it is actually a good thing, as even without the $250 they would have had their biggest increase in real benefit levels in decades.  Why?  Because nominal benefits cannot fall, even during deflation.  Whether Congress has money illusion, or whether they are responding to money illusion among the press and public is immaterial.  There is money illusion somewhere in the system.  There is no way Congress would have overrode the COLA formula for one year if prices had been rising, not falling.

Although it is clear that Tyler does understand the distinction between fiscal stimulus and a helicopter drop, I wanted to emphasize these points in case someone quickly skimming the post assumed (as I originally did) that Tyler claimed I thought the $250 windfall for seniors constituted a helicopter drop.  If that’s what the government really wanted to do, they would hand each person over 65 an envelope with two pictures of Benjamin Franklin and one of Ulysses S. Grant.  Speaking of which, isn’t it time for some new faces on our currency.  There must be a number of 2oth century figures at least as respected as Grant.   The two Roosevelts, Martin Luther King, etc.  (And that’s not even considering figures who were outstanding Presidents but who are not respected, like Calvin Coolidge.)  But why honor dead people at all?  Isn’t that a waste?  Economic theory suggests that we should be able to cash in on the privilege of being on the fifty.  You’re probably thinking that I have in mind a plan to sell the rights to the highest bidder, a rich person with a big ego. The “Trump” bill.  I’m not that crass.  I was thinking of a more subtle use of economic theory.  How about using the privilege to motivate better performance?  Isn’t economics all about incentives?  I suggest putting Obama on the $50.  Surely when Obama saw that he was in the midst of other greats like Washington, Lincoln, and Andrew Jackson, he would feel even more motivated to live up to the honor, to make his presidency worthy of being in that select group of dead presidents.  Franklin Roosevelt can’t be motivated any longer, but Obama can.

Indeed, perhaps all honors should now be decided not on what the various candidates have done, but on how much the honor could motivate them to reach even greater heights.  Indeed, how about the  .  .  .   Oh wait, someone beat me to the idea.  How come someone else always thinks up great ideas before I do!

Speaking of currency, why do we have technological progress in so many fields, but regress in the public arts?  If you want to know what I really think about cash, I prefer the mythological figures that used to be on our currency and coins.  The old designs were far more beautiful, and we already have too much hero worship.  When presidents are in office they are often viewed contemptuously.  Later they are revered.  But the first reaction was more accurate.  The contemporaries are the ones that knew them best.  They really are just schmucks just like us, who put their pants on one leg at a time.  I say get rid of all the dead presidents and bring back the beautiful Education Series of bills from 1896, and the attractive silver coins from the interwar years.  (Of course we have so debased out currency that we could only use silver plating today.)

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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