A Benjamin Cole post
There has been some blog chatter of late on helicopter drops, that is the central bank printing money to toss on the population, or to finance government operations, or to compensate government for tax cuts.
Kentucky economist David Beckworth is open to helicopter drops as income tax cuts married to QE. The highly-regarded economist Michael Woodford of Columbia allows for something similar, in his oblique fashion.
Of late, former Fed chief Ben Bernanke suggested that when times are really tough, he would hold his nose and pilot helicopter drops, which he dubs “money financed fiscal programs” or MFFPs. Bernanke’s blogpost appears to have cattle-prodded George Masonite scholar and top-blogger Scott Sumner onto the “last resort” whirlybirds, with many a hem, haw and harrumph.
So heavy hitters all say helicopter drops will work. In fact, Bernanke and Sumner go with the “nuke” analogy—printing money to run government will almost certainly work to boost the economy, but must only to be used to avert economic doomsday.
But is the “Helicopter Drops=A-bombs” analogy really accurate?
Who says the analogy is not, “Keep your best power-hitter on the bench, until you really need him to win the game?”
In other words, monetary macroeconomists may be poor managers. They prefer to hit singles with rate cuts, or IOER or not, or negative interest rates, or limited QE.
But what would have been the impact in 2008, if the Fed and federal government had gone straight to serious helicopter drops?
In truth, it is difficult to decipher certain finer points of what is a helicopter drop and what is not. The federal government after 2008 ran big deficits and the Federal Reserve simultaneously bought a few trillion dollars of U.S. Treasuries.
It sure looks to me like post-2008, the federal government in fact had a Bernanke-style MFFP going. Bernanke evidently contends that because post-2008 the Treasury issued bonds and the Fed printed money and bought the bonds (which they have kept on their balance sheet ever since), that post-2008 was not an MFFP.
Bernanke says MFFP happens only if the Fed prints money and hands it directly to the Treasury. The fig-leaf of the Treasury issuing bonds means post-2008 federal policy was only QE, not a chopper-drop.
But the key point is no one in the private sector had to give up cash (through bond purchases) to finance the federal deficit post-2008. The Fed printed the money that financed the government deficit.
Let’s call it a “whirlybird offload.”
Conclusion And Prophylactic Expansionism
There is traditional, institutional and professional reticence about helicopter drops in the macroeconomics profession, as revealed in Bernanke’s tortured nomenclature and use of acronyms to describe a central bank printing money and handing to the federal government. MFFP!
There may be sound political reasons for skepticism regarding helicopter drops—as in, the U.S. Congress might learn to love the choppers a little too much, and we would finally see the Inflation Bogeyman.
But in the next recession why not fly the money-choppers ASAP—in fact, send in the B-52s. Why diddle around?
And could there be a justification for modest-scale chopper-drops now? What would be the harm of the Fed printing up $200 billion and sending it across the street to the Treasury, and President Obama cutting federal taxes by a like amount?
Why does the Fed (or other central banks) always have to wait for a recession before acting? How about monetary prophylactic expansionism?