John Kay on helicopter money

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.]

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15 Responses to John Kay on helicopter money

  1. Nick Rowe says:

    Suppose the government is willing to redeem currency for CPI baskets of goods at an announced price level P*. (It’s price-level targeting). Now suppose that when it does HM, and increases the stock of currency by (say) 10%, it simultaneously increases P* by the same 10%.

    That should do it.

    In other words, HM is not HM unless it is accompanied by some revision of the (implied) price level path (or NGDP level path) target, that increases the demand to hold that currency.

    • Tony Yates says:

      I buy this if you change the post not to hang a definition of HM on its effects – I think it is what it is regardless. But I agree that its effects will depend on expectations about what the authorities are trying to do with it. So if, for example, expectations are that the authorities don’t want an increase in the price level. Then they will presumably conclude that there will be money redemptions at some point, and behave accordingly.

      • Nick Rowe says:

        “I buy this if you change the post not to hang a definition of HM on its effects – I think it is what it is regardless.”

        I had to read that 3 times. But fair point. Comes back to the “permanence” question, and the circumstances under which it will be permanent.

      • Tony Yates says:

        Sorry, was not well drafted.

  2. Mike Sproul says:

    My mechanic did $50 of work on my car, and I paid him by writing out an IOU for $50. He accepted it because he knew his worker would take it for wages. The worker accepted it because he knew the grocer would accept it. The IOU passed through 10-20 hands before my tenant handed it to me in payment of rent he owed. That IOU was my liability, just like a dollar is the government’s liability. I accept my IOU for rent, and the government accepts its IOU’s for taxes.

    • Tony Yates says:

      Your IOUs are not like dollars. It’s up to the government whether it treats the IOUs it prints as a liability or not. And some clearly have not, with spectacular results.

      • Mike Sproul says:

        It’s also up to me whether I treat my IOU as my liability or not. If I do not, then my IOU’s will lose value, sometimes spectacularly.

      • Tony Yates says:

        Well, there are courts to punish you if the other party chooses to use them. There is no contract law governing the subtle question of whether money is treated as a liability or not. Just ambiguous treaties that the government itself can choose to abide by, or not, as it is sovereign. And note that the govts IOU is just a promise to exchange the bearer note for the same thing, or can be interpreted like that.

      • Mike Sproul says:

        No court will trouble itself with my $50 IOU. People choose to accept it or not based on my reputation alone. I am just as sovereign as a government in that respect, but my IOU is still my liability, whether or not a court stands ready to throw me in jail. Conversely, there are governments that face sanctions from international courts if they fail to pay their IOU’s, and yet they don’t honor their IOU’s.

        My $1 IOU is not just a claim to another of my $1 IOU’s. It is a means to discharge rent or other debts owed to me. The same is true of the government’s IOU.

  3. “…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”. People value money – any sort of money – because it is generally regarded as or accepted as money. I.e. it can be used to purchase goods and services.

    The public sector can regard its money as a liability or a giraffe or a sperm whale, for all I care. That’s irrelevant. The important point is that it is regarded as money.

  4. Nelder Mead says:

    If the state (Govt + BoE) decides not to honour a cash liability in the future, that’s no different to the state imposing a wealth tax on the unfortunates left holding that cash when the music stops. So just a bog-standard fiscal stimulus recouped by future tax levy, I’d say, which puts me firmly in John Kay’s camp on this, I’m afraid

  5. JP Koning says:

    Hi Tony, looking through your previous post you wrote:

    “In the original [modern monetary DSGE model], it’s assumed that somewhere off in the infinite recesses of time, the government will pay back all outstanding bonds it has issued, but will also redeem money it printed for real consumption goods too.”

    Somewhat off topic, but is this the same assumption that generates the neo-fisherian result, that low interest rates cause low inflation?

    • mrkemail2 says:

      Because higher interest rates = paying free money to rich people.

      Meddling around with interest rates and giving people money for free is dumb anyway. You need “fiscal dominance.” You need to implement the MMT very strong auto stabiliser (“Job Guarantee”):

      Then as to bank lending, we should not make it more expensive, we should narrow it (“asset side discipline”), by making loans outside certain criteria unenforceable.

      In MY view the only reason we should pay bankers to do anything is if they can demonstrate the skill of underwriting capital projects against a prospective income stream.

      In simple terms this means somebody going into a bank with a proposal that requires a certain amount of money. The bank staff considers whether the prospective income stream proposed to repay that money is adequate to repay the loan and pay the wages and costs of the bank.

      The way I would narrow banks is to offer them an incentive – an unlimited cost free overdraft at the Bank of England. 0% funding costs. In return they must drop all the side businesses and just do capital development lending on an uncollateralised basis – probably in the form of simple overdrafts. In other words they become an agency businesses delivering state money to those that require it.

      Note: that there is no asset collateral involved in this process.

      There may be other criteria e.g. loans for automating business. It would be a list serving the public good.

    • Tony Yates says:

      Well, the same NK model with this assumption has been shown to have that neoFisherian outcome as an equilibrium; whether this is robust to dropping the redeemability assumption I’m not sure. I think it probably is, as the NF result holds in the cashless limit. So thinking rather loosely, the redeemability or otherwise of money that is no longer held, or very nearly, should be of no consequence. But this sort of thinking has led me astray more than once in this field.

  6. Tom Grey says:

    I favor trying Heli Money, and some 10% (of current total M1) would be a good start — the gov’t could print up 10% more in currency and distribute it in one-time tax refund checks to tax payers, up to 100% of their last 10 year tax total. Prices would NOT rise by 10%, but by something less, thru two effects:
    1) the stimulation of demand results in more employment and production. If this production increases by 10%, there will not be any net price change. (110% of money for 110% of goods).
    2) production will increase most where there are greater profit opportunities, so in some industries there will be very little change, often even a continuation of secular decline (like mainframe computers? Or mini-computers? if any are still made at all. ) Other areas that are growing might well grow faster than the 10%.

    In this respect, the 10% HM acts like grease to especially help those areas that are currently growing most, now.

    Finally, in order to see the real world effects of HM, there should be some real world attempts. With inflation below the 2% target, now would be a good time to do it; very possible (50% chance?) that inflation stays below 4%, a level that would only balance the 0% recent level.

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