Debt?

Chapter 11

What Have Others Written about Stimulus without Debt?

In the past few years there have been many blogs, short articles, and comments through various media about stimulus without debt and helicopter money. In this chapter I will review some of these writings and react to them. But I want to begin with an article written decades ago by Milton Friedman.

Milton Friedman’s Helicopter Parable

Friedman (1969) asked readers to imagine, as a thought experiment, a helicopter drop of money on a fully employed economy with national output (income) $10,000 per capita, and money $1,000 per capita held by the population. Each dollar number is an average; some individuals have higher-than-average income or money, others lower. Friedman analyzed the effect of a helicopter drop of $1,000 per capita—a doubling of the money held by the population to $2,000 per capita. Initially Friedman assumes each person picks up an amount of money equal to the amount he held before. Each now has more wealth than before,

so each person would decide to spend more. But with resources fully employed so that real output (Q) cannot increase, the result of this greater spending is an increase in prices (P)—temporary inflation. Friedman says that prices would double, real output and income per capita would stay constant, and nominal income per capita would double (from $10,000 to $20,000).

Recall that in my brief discussion of helicopter money in chapter 3, I said that stimulus-without-debt is similar to helicopter money in some ways but differs in others. It’s similar because in both the helicopter money parable and the stimuluswithout-debt plan the population receives newly created money as a transfer that can be kept, not a loan that must be repaid.

Stimulus without debt differs from helicopter money because stimulus without debt creates checks and balances by assigning specific roles to specific institutions in its implementation. In the parable, the helicopter drops the new money on the population— it’s a thought experiment, obviously not intended as a practical proposal for a modern economy. In stimulus without debt, the Federal Reserve creates the new money and gives it as a transfer (not a loan) to the Treasury, and after authorization by Congress, the Treasury mails tax rebate checks to the population. Stimulus without debt is intended as a practical proposal for a modern economy.

In Friedman’s helicopter parable the economy is at full employment when the helicopter drop occurs, whereas the stimulus-without-debt policy is used only when the economy is in recession, with the actual output of the economy well below potential output. Hence, in Friedman’s parable, helicopter money causes a rise in prices to a new level—a temporary inflation—whereas stimulus without debt in a recession causes an increase in real output and employment, not inflation. The sole purpose of Friedman’s parable is to show that in a fully employed economy an injection of money will raise the price level— it will cause a temporary inflation. Friedman made no comment

on what would happen if the helicopter dropped money on an economy in recession rather than at full employment. By contrast, my analysis in chapter 6 explained why stimulus without debt would move the economy from recession to full employment with little or no rise in prices.

In Friedman’s helicopter parable the money in the economy increases by the amount dropped from the helicopter, whereas under stimulus without debt, the Fed, in order to hit its interest rate target, will offset its money injection from its transfer to the Treasury by cutting its purchase of Treasury bonds in the open market. Hence, under stimulus without debt the net increase in money in the economy is likely to be much less than the Fed’s transfer to the Treasury.

Two key elements of stimulus without debt are (1) fiscal stimulus; (2) a transfer (not loan) from the Fed to the Treasury for fiscal stimulus so the Treasury doesn’t have to borrow (sell new bonds) to finance the fiscal stimulus. In his helicopter parable Friedman never used the phrase “fiscal stimulus” or “fiscal policy” and gives the false impression that his parable is solely about monetary stimulus or monetary policy. But this is incorrect. In our actual society, in contrast to Friedman’s imaginary experiment, cash transfers (such as tax rebates) to households are delivered by checks mailed out by the US Treasury under congressional legislation authorizing the transfers—by fiscal policy, not monetary policy. Friedman’s helicopter delivers a combined fiscal-monetary expansion.

A Central Bank Transfer to the Treasury in Recession

A key component of the stimulus-without-debt proposal is a large transfer (not loan) from the central bank to the Treasury

so that the Treasury does not have to borrow (sell new Treasury bonds) in order to pay for fiscal stimulus enacted by Congress in a recession.

When I published my stimulus-without-debt article in 2013, I was unaware of a short online column by Ricardo Caballero (2010). As far as I can tell, he has not written anything else on his proposal. Caballero, a professor of economics at MIT, noted that insufficient demand for goods and services kept output and employment far below potential in 2010, and what was needed was a boost in aggregate demand. He pointed out that, unfortunately, the Federal Reserve has the resources—money that it can create—to increase aggregate demand, but not the instruments of fiscal policy (like tax rebates) to get that money to people who will spend it. It is Congress, not the Fed, that has the fiscal policy instruments (like tax rebates), but not the resources (the ability to create money). It stands to reason, he wrote, that what is needed is a transfer from the Fed (the money creator) to Congress (which controls the fiscal instruments) so the Treasury, the agent of Congress, can implement its fiscal stimulus (such as mailing tax rebate checks to households).

In chapter 3 I gave a concise exposition of the main points from my 2013 article entitled “Stimulus without Debt,” which made the case for the policy in this book. Most but not all of the aspects treated in depth in this book were at least mentioned in that article. To my knowledge, my 2013 article was the first to give a lengthy exposition of stimulus without debt.

A direct transfer from the Fed to the Treasury in order to achieve stimulus without debt was proposed in a Wall Street Journal op-ed by Daniel Arbess (2013), an investor and policy analyst. Arbess noted that the Fed printed about $2.5 trillion of new money during the Great Recession, but much of it sat in banks instead of getting into the economy through household spending on goods and services. He said there was a more direct

way to channel Fed money into the economy. He recommended that the Fed bypass the credit channel: instead of buying bonds in the open market, which merely led to a buildup of funds at banks, the Fed should send cash straight to the Treasury, where it would be deployed as directed by Congress.

Adair Turner (2013), a former chairman of Britain’s Financial Services, recommended “overt monetary finance” of fiscal stimulus in a recession, but his recommendation was not stimulus without debt because he called for the treasury to sell new bonds to the public to pay for the fiscal stimulus and the central bank to buy treasury bonds from the public with new money. His proposal was a standard combined fiscal-monetary expansion with an increase in government debt equal to the fiscal stimulus. But two years later Turner (2015) proposed stimulus without debt. Under his 2015 proposal, in a recession fiscal stimulus—a tax cut or increase in government spending enacted by the national legislature—would be financed by having the central bank deposit newly created money into the treasury’s bank account in an amount equal to the fiscal stimulus. There would be no sale of new government bonds by the treasury and no increase in government debt.

Bernanke’s 2016 Blog on Stimulus without Debt

Before turning to Ben Bernanke’s significant 2016 blog urging serious consideration of stimulus without debt for the next severe recession, I want to go back to 2000 to describe the evolution of Bernanke’s thinking prior to 2006 when he became Chair of the Federal Reserve (Seidman 2006). Before he became a member of the Federal Reserve Board, Bernanke (2000) wrote an article on how Japan could stimulate a strong recovery from

its lingering recession. Bernanke referred to Friedman’s helicopter drop but noted that the Bank of Japan (BOJ) doesn’t have the authority to rain money on the Japanese population. He recommended that Japan make “money-financed tax cuts” to domestic households: Japan’s treasury would sell government bonds to the public to obtain the funds needed to maintain government spending despite the tax cut, and the BOJ would buy the bonds from the public with new money. He stated that the policy he proposed—a money-financed tax cut—would be a combination of fiscal and monetary policies and said that some cooperation would be required between the BOJ and Japan’s legislature.

It was not this 2000 article, however, that led some to call him “Helicopter Ben.” Instead, it was a single sentence from a speech (Bernanke 2002) he gave after becoming a member of the Fed board of governors in which he expressed support for a money-financed tax cut, and said that a money-financed tax cut is “essentially equivalent” to Milton Friedman’s famous helicopter drop of money.

Bernanke, however, in his 2000 article and his 2002 speech did not propose a transfer from the BOJ to Japan’s treasury. He proposed instead that Japan’s treasury borrow to pay for the fiscal stimulus by selling new bonds to the public, and that the BOJ buy the bonds from the public with new money. Under his proposal, Japan’s government debt would increase by the amount of the fiscal stimulus. Thus, Bernanke’s proposal was not stimulus without debt. It was a standard combined fiscalmonetary stimulus with the increase in government debt held by the central bank rather than the public.

In his article Bernanke (2000) made an important point concerning the independence of Japan’s central bank. He noted that his proposal required some cooperation between the BOJ and Japan’s treasury, and that this cooperation would not undermine BOJ independence. The BOJ would be taking a voluntary action

that promoted its goal. Bernanke’s point about central independence applies equally to stimulus without debt in the United States. The central bank would be taking voluntary action— giving a transfer to the Treasury—in pursuit of its mandate set by Congress to pursue high employment and low inflation.

As Fed chairman during the Great Recession, Bernanke took essential actions to combat the financial crisis. He also called on Congress to provide fiscal stimulus, implying that he recognized that monetary stimulus alone was not enough to overcome a severe recession. However, he never publicly raised the possibility of the Fed giving a transfer to the Treasury so that Congress could enact fiscal stimulus without increasing government debt. It was only after leaving the Fed and completing his book on his tumultuous term at the Fed that he publicly considered the possibility of stimulus without debt.

In his April 2016 blog post, Bernanke took the significant step of addressing stimulus without debt, which he called a “MoneyFinanced Fiscal Program” (MFFP). Bernanke said that an MFFP should be seriously considered in the next severe recession. He gave this illustration. Congress would approve a $100 billion one-time fiscal program—a $50 billion increase in public works spending and a $50 billion one-time tax rebate. Bernanke said this would increase the deficit $100 billion. Instead of paying for the $100 billion fiscal stimulus by issuing new government debt to the public, the Fed would credit the Treasury with $100 billion in the Treasury’s checking account at the Fed, and the Treasury would use those funds to pay for the new spending and the tax rebate. He then added that, “alternatively and equivalently,” the Treasury could issue $100 billion in debt that the Fed agreed to purchase and hold indefinitely, rebating any interest received to the Treasury.

I have two comments on Bernanke’s recommendation. First, Bernanke is correct that if the Fed credits the Treasury with

$100 billion in the Treasury’s checking account at the Fed, then clearly the Treasury would not issue any debt to finance the fiscal stimulus. This really would be stimulus without debt. But I disagree with his phrase “alternatively and equivalently.” Under his alternative, the Treasury would issue $100 billion in debt, and the official federal debt would increase $100 billion. That alternative, therefore, would not be stimulus without debt. I hope that Bernanke will, on reflection, delete that alternative.

Second, if the Fed gives a $100 billion transfer billion to the Treasury—whether by writing a $100 billion check to the Treasury, or by crediting the Treasury’s checking account at the Fed with $100 billion, there is no increase in the deficit because the Fed’s $100 billion transfer increases Treasury revenue $100 billion, which matches the fiscal stimulus of $100 billion. Bernanke’s language seems to imply, incorrectly, that the deficit increases $100 billion.

Bernanke then turned to practical implementation. In his view, the most difficult practical issues surrounding MFFPs would involve their governance—who decides what? He said an MFFP would require the cooperation of Congress and the Fed, and noted that critics might claim that such cooperation sacrificed Fed independence. Another concern is whether an MFFP would be a slippery slope for members of Congress, who might try to get the Fed to finance spending or tax cuts in a fully employed economy.

To implement an MFFP, Bernanke proposed the creation by Congress of a special Treasury account at the Fed. He offered a possible arrangement, set up in advance, that would work this way. Congress would create, by statute, a special Treasury account at the Fed, and give the Federal Reserve’s Open Market Committee the sole authority to fill the account up to some prespecified limit. The account would be empty most of the time. The Fed would use its authority to add funds to the account only when the FOMC assessed that an MFFP of specified size was needed to achieve the

Fed’s goals. If the FOMC filled the special account, Congress and the administration—through the usual, but possibly expedited, legislative process—would decide how to spend the funds—for example, how much on public works, how much on tax rebates. Congress and the administration would have the option of leaving the funds unspent. If the funds were not used within a specified time, the Fed would be empowered to withdraw them.

Bernanke emphasized the separation of powers in his proposal. It would leave to the Fed the responsibility of conducting the technical analysis of whether an MFFP was needed to achieve the Fed’s mandated goals, and of determining the corresponding amount of money to be created. Those conditions would help preserve the Fed’s policy independence and limit the ability of Congress to use monetary financing when the Fed judged such financing to be inappropriate for the economy. Congress and the administration would retain their constitutional authority to determine whether public funds would be spent, and if so how.

Like my stimulus without debt, Bernanke’s MFFP focuses on achieving a division of labor and a separation of powers: The Fed decides the amount of fiscal stimulus that Congress can enact without increasing government debt, and Congress decides the amount and composition of fiscal stimulus.

In his April 2016 blog, Bernanke said his MFFP should be seriously considered in the next severe recession. Hopefully, when the next severe recession occurs, Bernanke will forcefully advocate the implementation of his MFFP—stimulus without debt.

Central Bank Transfers to Households in a Recession

My stimulus-without-debt proposal assigns important roles to both the central bank and the national legislature: the central bank would give a large transfer of new money to the treasury,

and if the elected national legislature enacts fiscal stimulus, the treasury would use the new money (instead of borrowing by selling new bonds to the public) to pay for the fiscal stimulus. An alternative proposal would omit any role for the elected national legislature. Under this alternative, the central bank itself would give transfers of new money to households. Like stimulus without debt, this proposal would provide stimulus without any increase in government debt. As I explained in chapter 3, I strongly prefer my proposal because it provides a separation of powers and checks and balances between the central bank and the national legislature.

In 1999 Gregory Mankiw, a professor of economics at Harvard who a few years later served as chairman of the Council of Economic Advisers for President Bush, wrote a short article in Fortune magazine giving advice to Japan on how to fully recover from its recession. The title of his article was “Memo to Tokyo: Cut Taxes, Print Money.” He recommended “printing some new 100,000 yen [$1,000] notes and sticking one in the pocket” of every citizen.

But in his short article, Mankiw didn’t clarify how he wanted the newly printed money to reach the pockets of citizens. There are three different ways to make this happen. Under the first, the central bank would mail transfer checks to citizens; there would be no increase in debt but no role for the national legislature. Under the second, the central bank would write a large transfer check to the treasury and the treasury, if authorized by the national legislature, would mail transfer (tax rebate) checks to citizens; this is the proposal I set out in detail in my 2013 article. Under the third, as Bernanke recommended in 2000 and 2002, the treasury would borrow by selling bonds to the public, the central bank would buy the bonds from the public with new money, and the treasury would mail transfer (tax rebate) checks to citizens. Under the first and second, there would be no increase in

government debt, but under the third, government debt would increase. In his short article, Mankiw did not say which approach he recommended.

In his online column entitled “How about Quantitative Easing for the People?” Anatole Kaletsky (2012a) called for transfers from central banks to people. Kaletsky lamented the fact that the huge amounts of new money created by the Federal Reserve and the Bank of England to combat the Great Recession had all gone to buy government bonds. He proposed that instead of giving newly created money “to bond traders,” the central bank should distribute new money directly to the public. He noted there would be no increase in government debt. He said that giving large amounts of money to people might seem “wildly irresponsible,” but he pointed out that during the Great Recession central banks had used large amounts new money to buy bonds and make loans to banks, and that redirecting the new money to the public would be fairer and more effective because people would use a portion of their transfers for consumption.

A week later Kaletsky (2012b) followed up with a second column addressing objections he received in response to his first column. He said the most powerful objection was that it seemed too good to be true that new money could give given to people to stimulate spending, production, and employment without increasing taxes, government debt, or inflation. Economists often say that there’s no such thing as a free lunch, and this proposal seemed to violate that assertion. Kaletsky replied that in a recession with idle workers and idle machines, output was below potential, so that a free lunch could indeed be obtained by a policy that employed idle workers and utilized idle machines.

In an article entitled “Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People,” Blyth and Lonergan (2014) wrote that central banks should “hand consumers cash directly.” They said the central bank might limit

eligibility to taxpaying households, might distribute cash equally to all households, or might just distribute it to the bottom 80% of households. But raising these options reveals the difficulty of excluding the national legislature from the process. Which is the more appropriate institution to make these decisions: an unelected central bank or an elected national legislature? Elected national legislatures make these decisions for many tax and spending programs. Legislatures decide how much a household’s tax will vary with a household’s income, or whether benefits paid to households should be the same for all households or vary with household income. Under my stimulus-without-debt proposal, the national legislature—in the United States, Congress—would make these decisions for the components of the fiscal stimulus package.

Other Writings

In an online article, Simon Wren-Lewis, professor of economic policy at Oxford, gave a primer on helicopter money (Wren-Lewis 2014) that also applies to stimulus without debt. He agreed with my point in chapter 3 that financing fiscal stimulus with new money from the central bank (helicopter money) would not increase government debt, in contrast to a standard combined fiscal-monetary stimulus. Recall that under the standard combined stimulus, the treasury borrows by selling new government bonds to the public, and the central bank buys an equal amount of government bonds from the public. Wren-Lewis contended, as I did in chapter 3, that government bonds held by the central bank should be included in government debt because at any moment the central bank might sell bonds to the public, which would expect to be paid principal and interest on schedule. He also agreed that an important share of tax rebates would be spent, increasing aggregate demand for goods and services.

Wren-Lewis revisited helicopter money in another online column a few months later (Wren-Lewis 2015) to focus on whether helicopter money can be reversed in time to prevent inflation in a strong recovery. When a central bank buys government bonds in the open market, it can later sell bonds to withdraw money from the economy. But if a central bank gives a transfer to the treasury, it doesn’t obtain an asset it can later sell to withdraw money. I gave my answer to this question in chapter 6. I showed that in an economy where output, income, and money are all growing, the central bank can prevent inflation by temporarily reducing the amount of government bonds it buys and therefore temporarily reducing the growth rate of money; the central bank doesn’t need to sell bonds; it just needs to buy fewer bonds, thereby slowing the growth of money, to avoid inflation.

An advocate of monetizing the debt in a severe recession is Michael Woodford (2013), a professor of economics at Columbia, who stated in an interview that the fiscal authority would make the transfers to households, sell bonds to pay for them, and later tax people to service the debt; the monetary authority would conduct open-market operations in the amounts needed to keep nominal GDP on the target path. In his interview Woodford did not call for the central bank to give a transfer to the Treasury so that the Treasury could finance a fiscal stimulus without borrowing.

Australian economist Richard Wood (2012), in an article entitled “The Economic Crisis: How to Stimulate Economies without Increasing Public Debt,” proposed that the treasury or ministry of finance of a nation, not its central bank, create the money to pay for the fiscal stimulus enacted by its legislature. The problem in the United States is that if Congress authorizes money creation by the Treasury, there would be a breakdown of current checks and balances because Congress would directly

control money creation as well as spending and taxation. This raises the possibility that Congress might raise government spending well above taxes in a normal economy when no stimulus is warranted, and create money to cover the difference, thereby unilaterally injecting a combined fiscal-monetary stimulus that overheats the economy and generates inflation. By contrast, under the stimulus-without-debt plan, Congress, not the Federal Reserve, would authorize the tax rebates to households, and the Federal Reserve, not Congress, would decide the specific amount of money to transfer to the Treasury.

In an article entitled “The Simple Analytics of Helicopter Money: Why It Works—Always,” Willem Buiter (2014) gave a mathematical analysis of the impact of helicopter money. He emphasized that “fiat base money” is “irredeemable”— viewed as an asset by the holder but not as a liability by the issuer. I agree: government paper money is not government debt; only government bonds are government debt, so that my policy, under which fiscal stimulus is financed by new government money rather than government bonds, really is stimulus without debt. Buiter also said that helicopter money raises aggregate demand because it is net wealth to the private sector. Once again I agree: tax rebates to households that are financed by new money raise the wealth of households, which therefore spend some of it.

Articles in The Economist

The Economist weekly newspaper (magazine) is a good place to see how seriously a new economic policy proposal is being taken. In 2016 several editorials (“leaders”), articles, and blogs in The Economist called for serious consideration of helicopter money and/or stimulus without debt. An editorial (Economist 2016a)

entitled “Out of Ammo?” called for legislators to work together with their central banker to stimulate their economy. It called on legislators to enact transfers or tax cuts for households and the central banker to finance them with newly printed money, so new money would go from the central bank to the legislature to households, thereby avoiding banks and financial markets.

A “Free Exchange” one-page article (Economist 2016b) entitled “Money from Heaven: To Get out of a Slump, the World’s Central Bankers Consider Handing out Cash” begins by saying that helicopter money is a daring approach to monetary policy: printing money to fund government spending or to give people cash. This daring approach is now being taken seriously. Mario Draghi, the president of the European Central Bank, called helicopter money a very interesting concept. Though daring, helicopter money is a less radical departure than it sounds. Milton Friedman’s helicopter money parable first got serious attention in the early 2000s when economists tried to figure out how Japan might escape from its decade-long stagnation and mild deflation. Ben Bernanke, as I have mentioned, made reference in an article and a speech to Friedman’s parable, and soon was being called “Helicopter Ben.” Today, many of the world’s advanced economies are plagued with stagnation in the aftermath of the financial crisis. The stagnation has not yielded to either conventional or even unconventional monetary stimulus. A new strategy is surely needed.

The “Money from Heaven” article says that most advocates of helicopter money argue for fiscal stimulus (government spending, tax cuts, or direct payments to citizens) enacted by the national legislature, financed with newly printed money provided by the central bank to the treasury rather than through borrowing by the treasury. Some advocates even call for the central bank to act without the national legislature, directly distributing new money to households; Jeremy Corbyn, leader

of Britain’s Labour Party, has proposed this, calling it a “people’s QE.” In an economy with idle workers and machines, helicopter money would mainly raise output and employment, not prices. Modern central banks in advanced economies are wary of inflation and therefore likely to stop printing money once the economy is nearing full employment. The real problem with helicopter money is that there is likely to be resistance to using it. European law generally forbids the central bank from financing fiscal stimulus enacted by national legislatures, and many central bankers appear to be support this prohibition. Draghi barely managed to get support for the European Central Bank to buy national government bonds. Many national legislatures seem more concerned about cutting deficits than about stimulating their economies. The article ends by saying that what’s missing is the political will to use helicopter money.

Conclusion

These articles and blogs about stimulus without debt and helicopter money indicate that the proposal has made headway, receiving attention and some support in a period when most advanced economies have been in recovery, not recession. The next time dark recession clouds loom on the horizon, it seems likely this proposal will receive the attention it warrants.