A Benjamin Cole post
The British monetary thinker Lord Adair Turner contends that helicopter drops, at least those designed as money-financed fiscal programs (MFFPs), will work to counter recessions and slow growth, and macroeconomists know they will work.
Turner says the usual objection to chopper drops is political—a fear the money-printers will gain the upper hand, rout common sense, and charge to hyperinflation. Turner may be too kind; some people oppose chopper-drops due to sheer dogma.
So, why not a “Taylor Rule” to guide or restrict MFFPs?
The Taylor Rule
Here is one version of the Taylor Rule:
i = r* + pi + 0.5 (pi-pi*) = 0.5 (y-y*)
Where i is the nominal federal funds rate, r asterisk is the real federal funds rate, pi is the rate of inflation, p asterisk is the target inflation rate, y is a logarithm of real output, and y asterisk is a logarithm of potential output.
True, the Taylor Rule makes less sense when deflation becomes the norm, and there seems to be no provision for quantitative easing (QE), although Taylor has gushed about the use of QE in Japan.
And as even with Market Monetarism NGDPLT, there can be agendas hidden in the little numbers of the Taylor Rule. For example, a tight-money fanatic could praise NGDPLT—as long as the target was a 2% increase for every year.
Marcus Nunes would add that monetary rules should target results, not process. Still, when it comes to helicopter drops, some rules might provide comfort.
Chopper Drop By Code?
So let’s listen to Marcus and target 6% NGDPLT.
How should a chopper drop code or formula read?
How about this: For every 1% below a target of 6% increase in annual NGDPLT, then $100 billion of money-financed fiscal policy is induced, preferably through cuts in payroll taxes.
In this plan, payroll taxes would be cut by $100 billion for every 1% deficit from target, and the Federal Reserve would print up $100 billion and turn it over to the Social Security-Medicare Trust Funds.
No doubt some readers will have a great deal of uneasiness with this proposal.
But does the current Rube Goldberg arrangements of the Federal Reserve, working through the 22 primary dealers, prosecuting the buying and selling of Treasuries on the open market, and the passing through of interest but not principle from the Fed to the U.S. Treasury, really make sense? Would anyone design such a system from scratch?
Furthermore, the present-day claptrap system relies on major extent on private-sector but extraordinarily regulated commercial bank lending to expand economic output. But banks are loath to make unprofitable loans, and the bulk of bank loans are on property. In other words, the Fed is trying to stimulate the economy through property markets, or (more usually) apply the monetary noose. The noose we saw in 2008, btw.
As noted by many, the targeting of interest rates and inflation is off-center. The target should be expansion of GDP, also called nominal GDP, and preferably the NGDPLT.
Surely, any rules that apply to helicopter drops could be tweaked, although the more simple, the better.
And in the end, it does not matter if inflation is 1.4% or 2.1%, though the current FOMC, and cult of central banking, seems to regard such trivia of Titantic importance.
What matters is sustained growth of NGDPLT, and a nation that consistently pursues pro-business policies.
PS I wonder if federal agencies, including the Federal Reserve, are collecting data as they could. With the advent of bar codes, many national retailers know daily sales. National hotel chains and airlines at any moment know their room and seat counts. Many traffic-monitoring systems exist. Is it not possible to generate a fairly accurate, timely picture of NGDP, and adjust helicopter drops accordingly?