John Kay has written the first in a series of posts on monetary policy, and he starts by trashing helicopter money. I also disagree that HM should be contemplated, at least in any economy save Japan, but I think he makes a misstep on his journey to the same conclusion.
The issue concerns whether fiat money is to be considered a liability of the public sector. Many of HM’s proponents – Kay references Willem Buiter – start from the presumption that it is not. And from there deduce that handing out paper that is an asset for the recipients, but not a liability for the issuer, will stimulate spending.
Where Kay goes wrong – I think – is in asserting that money is a liability of the public sector from having noticed that the government will currently accept it as payment by the private sector in respect of liabilities to it – eg taxes owed.
Kay’s observation that governments do this now is of course correct. [Perhaps with the exception of a few Communist countries where state shops only accept foreign exchange]. But that is not enough evidence to decide on the question posed by the HM modellers and their adversaries. That conversation is about whether the following statement is true: ‘should we model the effects of HM [or any policy] by taking it that the public sector promises, come what may, to levy a stream of future taxes [net of spending] to reimburse the private sector for the real value of the entire stock of bonds and money?’
That up until now governments have taken cash in payment of taxes cannot decide this question. It may simply tell us that the government goes along with the coordinated view that money is to be accepted because it knows that it can get rid of it again, and is behaving, therefore just like any other private individual. It may indicate what John Kay wants it to, which is that the government is seeking to nurture the value of money by indicating that it values it, and perhaps that could be stretched to suggesting that the government stands ready to make good on all the money issued. But we can’t be certain. And it’s resolve to do that might be sorely tested by a sudden rush of demand to pay down tax obligations in cash. Or, at least, expectations about its resolve might be so tested; and especially by observing that the state was resorting to HM.
The question argued about by the HM debate participants is a behavioural one, and it concerns the behaviour of the government in the future. So I’m not sure what evidence you could use to decide conclusively on the point at issue here.
I don’t side with Buiter, however, as I explained here some time ago. He knocks out one assumption in the standard model – that money is not treated as a liability by the public sector – and uses the rest of the model to conclude that HM is always effective. But in doing so he leaves in place the assumption made in that model that people value money for its own sake. This is a piece of analytical sticking plaster. Put there to proxy for otherwise unanswered questions about why people value money. IMO if you take away the assumption about the public sector treating money as a liability, leaving this other assumption in – that people value money for its own sake – has less validity.
To decide properly on this, we need to go to deeper models of money, not partially dismantle a superficial one. And that means studying HM in the kind of models built by Steve Williamson and his tribe [Wright, Lagos, Kiyotaki etc], or at east the older overlapping generations models of money. I haven’t thought or read about HM in these models so don’t know what they would have to say on the question.
[I should acknowledge that this post came out of an exchange with AN Other anonymous monetary economist, without implicating them in any mistakes here.]