Central Bank Policy: If you need negative interest rates, it's time for a helicopter drop

Great Debates
#1

Background:
Last month Sweden’s central bank lowered its bank lending rate. From -0.35% to -0.50%. The Eurozone and Japan are also in negative territory. Swiss rates have been below -0.50% for a while. It turns out that banks will pay central banks a percentage fee for holding their electronic cash. As I understand it, storing physical cash is expensive. It’s not so expensive that the market would support rates of -3.0% (my WAG), but apparently -0.50% is ok.

The US’s Federal Reserve won’t rule out such a policy, but doesn’t plan on it either. Legalities have to be sorted out. Also we’re in recovery.

Naturally, low rates get passed on to consumers: I understand that Swiss banks pay negative rates, but I am not sure. In the US those with lowish balances pay monthly fees on zero interest rate checking accounts, so there’s nothing stopping them from charging per dollar deposited AFAIK.

I say the central banks are grasping at straws. It’s time to stop the Chinese water torture and plan a helicopter drop. As a joke, that means dropping cash out of helicopters. As a not-joke it means increasing the money supply by simply writing a check out to every citizen. And keep writing checks until you hit some sort of benchmark such as -yes- 3% core inflation. Call it a tax cut if that floats your boat. Issue new bonds and have the central bank purchase them.

The US had inflation higher than 3% prior to 1997 and there were no complaints. From 1985-1991 core inflation fluctuated in the 4-6% range, and there were… very few complaints. Under Nixon, core inflation hit 7% in 1970 and double digits after 1974. It didn’t come under control until Carter appointed Paul Volcker to head the Federal Reserve in October 1979. I’m not calling for a return to double digits. Again: 3%. Because enough is enough: it’s time to stop screwing around. Also, if you have an infrastructure deficit, spend money on that. Core inflation chart: https://research.stlouisfed.org/fred2/series/CORESTICKM159SFRBATL

What if they overshoot? What if they hit 5% or 6% core inflation? Well, so what? Central banks know how to get inflation down. Raise overnight interest rates so that they are 2-3% above the inflation rate. That can involve recession if they do it too rapidly. But the worst case scenarios are superior to another lost decade. And I don’t think they have to happen anyway.

This will require legislative action and coordination across branches of government. I call upon world leaders of the developed world to put down their donuts and start making phone calls. Also, ignore the views of inflation hysterics with awful track records. I call upon the world’s citizenry to point and laugh at them, starting with this message board (in a GD-worthy manner of course). It’s for the good of the world.

Addenda: Here’s a somewhat longer core inflation series. It’s a little different than the CPI which appears in the papers. Scroll down: under units choose “Percent change from a year ago.”


Or look here:
http://wm40.inbox.com/thumbs/a0_130b1e_9c8f8a7_oG.gif.thumb

European Central Bank tries to revive European economy:
http://www.motherjones.com/kevin-drum/2016/03/ecb-announces-last-ditch-effort-revive-europes-economy

#2

When do you begin to question your ideology?

There have been hysterics predicting deflation for several years. They were just as wrong as those predicting high inflation. Are they worthy of ridicule too?

#3

Well, there’s two problems with the “Helicopter Drop”. The first is that no one would believe it would be a one-time event In fact, according to your plan, it sounds exactly like you mean for it to go on for as long as necessary, which necessary means repeating it. The second issue is that this doesn’t seem like it would fix the fundamental problem: you can’t fix basic economic mismatches with more money. That is, it strikes me that the central banks are trying to use negative rates to spur investment and consumer spending, but it’s not working because investors and consumers don’t see spending as worthwhile. Shoving more money into their hands won’t necessarily change that calculation.

#4

Four ways to inject more money into the economy:
[ul][li] 1. Print banknotes and drop them over urban areas from helicopters.[/li][li] 2. Cut taxes (or retain earlier tax cuts) primarily for the rich.[/li][li] 3. Buy $2 trillion of troubled debt at prices well above the market price. If the banks can’t find anything useful to do with this sudden influx of cash, pay them billions of dollars in interest just to store their new money on a government computer.[/li][li] 4. Spend public money on repairing bridges, jobs training programs, improving and making more affordable public schools and universities, welfare programs like childcare and veterans’ healthcare,and subsidizing research into genetics, energy, etc.[/li][/ul]

With option (1) much of the money will end up in the hands of drug addicts and pimps.
With options (2) and (3) much of the money will be used to expand non-productive financial operations, and spent on imported luxuries.
I support option (4).

So you reject option (1). Do you also reject option (2) for similar reasons?

#5

WHile option 4 sounds nice, it’s far easier said than done. Second, even if you do succeed in throwing money, you’re not necessarily getting anything useful out of it. Research, healthcare, and infrastructure aren’t simple Insert-Coin-For-Productivity engines. If it were so, we wouldn’t have to argue about more or less anything regarding economics.

I don’t support any of the above. Given the state of a number of the world’s economies, it’s probably time for governments to step back, take a deep breath, and consider the fundamental problems. Strictly speaking, now is not a good time to be reviewing laws, smoothing and adjusting regulations, and rationalizing the regulations. Ten years ago was a very good time. As we lack time machines, now will have to do.

Governments would rather throw money at the problem, but that likely won’t solve any actual problems. With “luck,” it may paper over the issues, but it doesn’t correct basic economic mismatches, necessary social adjustment, or other crises-in-the-making. If it did, Japan and Greece wouldn’t be going though the painful corrections or stagnation.

#6

Well, the important thing, I think we all can agree, is that the poor and the middle class should not get any of this money. Because they’d just spend it on necessities and stuff. That couldn’t possibly do any good.

BTW, Trinopus, I suspect you are being facetious with your objection to option 1, but just in case someone doesn’t know: the drug testing of welfare recipients is showing that their addiction rate is just about the same as that of the middle class and the wealthy. And pimps are MUCH rarer than the media would have you believe. NGOs that make money by creating human trafficking scares tend to way overinflate the number of prostitutes who have a male in charge of them and living off their proceeds. Otherwise, they could be seen as preying on the prostitutes, which is pretty much what most of them do. Same for the cops. And the media sucks stories about women enslaved by pimps because they are so dramatic, y’know. Pimps exist, but they are MUCH rarer than the media would have you believe. Point is, the money you drop in urban areas would mostly help a bunch of working people with crappy jobs who are trying to get by. Because most poor people aren’t unemployed, they work at crappy jobs. So, your objection to number one does not stand.

#7

My name isn’t Trinopus, but, yes, I was being somewhat facetious.

#8

Trinopus, Septimus, potayto potahto

#9

I don’t understand the problem. It used to be absolutely normal for people to pay banks to look after their money.

#10

Last I heard, banks were still offering positive rates to customers. The negative rates are from central banks. But yeah, creditors to governments are actually paying for the privilege.

#11

My ideology is textbook economics. It gets reviewed all the time, continuously.

I would need an example of someone who has predicted deflation continuously over the past few years. Not just once. Multiple times. And then doesn’t update their thinking in the face of opposing evidence.

Let me be clear. We had folks looking at QE, applying folk economics, and predicting hyperinflation. Yes: hyperinflation. Rates exceeding triple digits. Instead, inflation declined subsequently. One would think that would prompt some reflection and review. Apparently not.

In contrast, textbook economists have updated their thinking on the minimum wage, as well as their understanding of the politics of fighting depressions with conventional fiscal policy. To take 2 examples.

It stops when inflation hits 3%. Not sure what the problem is. (Go on… there may be an issue with precedent.)

Shoving money into peoples hands tends to increase spending. Just as raising taxes tends to decrease spending. Here is one cite: http://eml.berkeley.edu/~dromer/papers/RomerandRomerAERJune2010.pdf “”

[quote=“septimus, post:4, topic:748632”]

Four ways to inject more money into the economy:
[ul][li] 1. Print banknotes and drop them over urban areas from helicopters.[/li][li] 2. Cut taxes (or retain earlier tax cuts) primarily for the rich.[/li][li] 3. Buy $2 trillion of troubled debt at prices well above the market price. If the banks can’t find anything useful to do with this sudden influx of cash, pay them billions of dollars in interest just to store their new money on a government computer.[/li][li] 4. Spend public money on repairing bridges, jobs training programs, improving and making more affordable public schools and universities, welfare programs like childcare and veterans’ healthcare,and subsidizing research into genetics, energy, etc.[/ul] [/li][/quote]
5. Write a check for $1000 to all of the citizenry. (Or rather 1000 euros: the US may not need a figurative helicopter drop.)

#12

(Mr. Measure spoke about Europe, but I referred it to the more familiar U.S.A.)

The threat of deflation was probably similar to the Y2K problem. It’s failed to occur not because the pessimists were wrong, but because strong counter-measures were taken. The worst of the Great Depression might have been avoided if a very loose monetary policy had been adopted. (Measure, when you speak of predictions of hyperinflation, I assume you’re referring to YouTube goldbug bloggers, not real economists.)

Lack of a good national ID system may make it hard to get the $1000 to every needy person. That’s one reason I favor infusion via services, e.g. free healthcare.

#13

Not real economists. Well sometimes real economists in speeches before those who should know better.

John Cochrane is a fantastic financial economist. He is also a conservative. And he made a facepalming speech in 2009, when it really would have been better not to fan the flames of crackpottery. John Cochrane: [INDENT]JOHN COCHRANE: Thank you. To learn, say, what the lessons are of the Great Depression, I think it’s good to recognize some ways in which things are the same, some ways in which things are profoundly different, and to try to understand why things work and don’t work. Otherwise you just end up fighting the last war. For example, then we had deflation that contributed a lot to the credit problems because people had to pay back with more expensive dollars. That made the banks less solvent, for artificial reasons. We went through a whole wage thing this morning without mentioning deflation. The reason wages were high is that nominal wages stayed the same and the price bubble went down.

We learned that lesson. We’re not going to have deflation. That’s a fundamentally different situation for everything else we’re doing. In fact, as many people have mentioned, the danger now is inflation. And I would say it’s a greater danger than most of the other people have said. Our danger now is a run on Treasury debt. It’s not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don’t want either money or Treasury bills or anything labeled “U.S. Government.” The danger is not 1932; the danger is Argentina, a massive run from Treasury debt. And then monetary policy will not be able to do anything. You can fool around with interest rates all you want. When people don’t want Treasury bills or money you’re stuck. http://www.cfr.org/united-states/new-financial-deal-do-1930s-teach-reforming-todays-financial-markets/p19004 [/INDENT]

Brad DeLong mocked Cochrane for saying that the US was going to turn into Argentina. Properly, I think. Cochrane responded that, no, he was talking about a risk of the US turning into Argentina.

That strikes me as a lame comeback, given the absence of qualifications in his speech, nay absence of discussion of the risks of applying too little stimulus. Nothing about Japan, which had experienced a lost decade (admittedly while applying lost of fiscal policy, but without the apparently necessary component of monetary commitment).

Anyway, to address the “risk” of the US turning into Argentina!1! DeLong offered a bet. Basically he wagered 50-1 that the US would be far far from Argentinian levels of inflation from 7/2012 - 7/2015. Cochrane wouldn’t take the bet. But a pal of DeLong’s did, just to make it interesting. The bet resolved last July: core inflation had remained below 5% at those times that unemployment was above 6%. DeLong, unsurpringly, won. Pizza ensued. http://delong.typepad.com/sdj/2012/07/is-the-us-at-risk-of-becoming-argentina-the-bet-with-noah-smith.html

Gee that’s too bad. But this isn’t about the poor. And if they can’t fill out the proper tax form to acquire $1000, they probably won’t vote. So I don’t care. The advantage of the helicopter drop is that it’s easy to ramp up to any level you want. Frankly though, I’d be inclined to build infrastructure first, if there were good projects to be funded.

Anyway, it’s a temporary program - I don’t want to give free healthcare, then yank it away. And again, I’m advocating it for Europe in 2016 and for the US in, say, 2009-2011.

#14

Measure for Measure, I don’t believe that cite says what you think it says. However, your statements have been somewhat vague. COuld you clarify exactrly what you propose?

However, let me point out that the Helicopter Drop scenario contained a fairly important, if subtle, point, which you brushed off before. People had to believe it would not be repeated. I.E., the point was just to jumpstart inflation itself, not to correct a basic economic flaw. You seem to proposing a kind of Quantitative Easing, which is a somewhat different idea. Friedman’s Helicopter Drop was about managing deflationary pressures. However, the usual understanding of it today, and I think the ones you’re following, is actually intending a sort of semi-permanent Keynesian stimulus. There are several issues with that as well, but I don’t want to criticize unless we can agree on exactly where you’re going with this.

#15

I am still waiting on my home loan with a negative interest rate. I take out a bunch of money, and they pay me interest on it!

#16

I wouldn’t hold my breath. Even if we get to negative rates, you’re not going to get them as a private borrower.

#17

Be careful what you wish for Hermitian. How would you like to receive 1% for your borrowed money… while your wages are dropping by 10% each year? Ok, ok not likely now, at least yet.

smiling bandit - Nice post (#14). I think we have some mutual misunderstanding. I’m going to be long-winded now: it might take a couple of rounds before we’re on the same page.

Background. My views are shaped by 3 events. They are the Great Depression, the Japanese stagnation of 1990-now and the inflation of the 1970s. In that order. I’m a deflation hawk, as I fear the sort of death spiral we had during the 1930s. I’m not exactly a recession hawk, as temporary recession risk, while unfortunate, can be the price paid for controlled inflation. I do take a dim view at lost decades, as I think they are wholly unnecessary in the developed world and against the true interests of the 100%. (I say that the few who might benefit monetarily would have more fun in a robust economy anyway.)

I see helicopter drops as a form of or at least an analogue to non-conventional monetary policy. Sort of like Quantitative Easing. I don’t see drops or QE as necessarily one off deals. I mean it would be good to take steps so that they are not necessary in the future. But that’s not to say they can never happen again.

Is there a moral hazard associated with helicopter drops? Is there a reason why people have to view them as one-off events? I’m honestly not sure where you’re going with that. If people think they will receive $1000 in the mail every 3 years, they will tend to spend more of the current check (and save less of it). So to the extent that there’s a “Permanent Income Effect” it tends to support the idea of the helicopter drop.

What Friedman might argue is that Helicopter Drops will do very little: people will just save maybe 95% of it because they like to smooth their consumption. I agree there is a permanent income effect. But empirically, my take is that it is nowhere near as strong as the simple model implies. (And indeed, Milton Friedman himself didn’t lack common sense - simple models show extreme cases to advance understanding of the underlying effect. That doesn’t imply that they capture all aspects of empirical reality.) I seem to recall that while temporary tax cuts during recession indeed led to a fair amount of paying off credit card debt (which corresponds to an increase in savings), balances tended to get built back up over the next several quarters. So while temporary tax cuts stimulate less than permanent ones, it doesn’t follow that they do nothing at all.

Also, the phrase helicopter drop comes from Bernanke AFAIK. I’m unaware of Friedman’s commentary on it - though I trust Friedman did talk about temporary tax cuts which amount to the same thing for our purposes. Friedman did think that the New Deal was acceptable as an emergency measure, but I see that as a separate argument.

Semi-permanent stimulus. Essentially I want to do what’s necessary to (say) jump start the Japanese economy. That would involve a 3% core inflation target and monetary firehoses directed at the bank accounts of the public until the target is hit. For the US, I think this sort of moment has passed, though I would like a burst of infrastructure spending.

(Hellestal would call for nominal GDP level targeting rather than the 3% inflation target. I’m actually good with that. I do think that when the current standard regime of a 2% core inflation target is shown to be consistent with lost decades, then it needs to be fixed. Simply ignoring the problem is unacceptable.)

#18

I believe you’ve confused the Helicopter Drop scenario with stimulus. The Helicopter Drop scenario was proposed by Milton Friedman, not Bernanke. Ben Bernanke popularized the phrase in recent times to demonstrate his dedication to avoiding certain problems. Part of the general practice of the Fed is to make statements very carefully in order to send, or not send, messages to the financial community. Friedman did not by any means argue Helicopter Drops were ineffective: they were his (tongue-in-cheek) idea! But that doesn’t mean they are all-powerful. Friedman was also dead long before Bernanke said anything about as far as I know, so I suspect Friedman had no further commentary.

In other news, General Francisco Franco is still dead.

If you’re functionally handing people money, you’re not engaging in a fiscal fix. You’ve jumped towards a wonky and inefficient version of basic income, which is a very different plan with very different methods, downsides, and goals. Helicopter drops were intended to be a last-resort to avoid deflation. This is important, because if you want to push people towards spending over saving, you need them to know it’s a windfall which won’t be repeated. (In fact, it can be argued that implied randomness in “throwing money out the helicopter door” is precisely the point. The fact that random people would inevitable get more, and some would get none, may actually help the goal.) What you propose would just be counted as part of income, and planned for, or not planned, like any other income. Also, economic conditions usually change much faster than once every three years.

First, Japan’s government has tried some massive shock therapy stimulus in the past. These failed, because Japan didn’t fix the fundamental problems which are locking their economy. (That may be changing, but the results are not yet clear.)

Second, you can’t realistically have semi-permanent stimulus and shock-therapy. There’s two reasons for this. First, while government spending can increase GDP in theory, and providing one can borrow at low rates like now, there’s always a price at some point. Governments must also be spending money for things better than the private market would, which is a very hit-or-miss metric. Sometimes, through luck or wit, governments make good choices. Sometimes they do not, or they may latch onto a good thing until it goes very, very bad. Additionally, there’s the further problem that infrastructure spending is the slowest and least certain form of stimulus. That the last time a big infrastructure push was tried here in the United States, it largely failed, and ended up taking years longer than intended, with effects so small they were hardly measurable. This is because it proved very difficult to even identify and begin these projects, and they tend to take a long time to complete. Unfortunately, the economic benefits of additional infrastructure tend to be extremely marginal. We’re simply not longer in the position where a canal or highway adds significant value. Good projects certainly exist, but they aren’t an easy or immediate fix either for stimulus or for monetary purposes.

Third, there’s a huge difference between economic troubles and deflation. Deflation is viewed with horror by financial types for varius and sundry reasons. It’s not necessarily a bad thing in and of itself. Strictly speaking, the important thing is that rates are generally predictable. Apart from that, they are technically irrelevant.

#19

Hm. I just poked around the internet a little. Permit me to fight some ignorance, including my own. Sort of a tangent.

Investopedia summary of helicopter drops: http://www.investopedia.com/terms/h/helicopter-drop.asp

Friedman died in 2006, Bernanke’s helicopter speech occurred in 2002. The original Friedman quote is from 1968. I had in mind borrowing funds, writing checks out to every citizen (or giving them a fixed tax credit) and having the Fed buy the bonds. My conception was closest to Bernanke (2002), emphasis added:
[INDENT] So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. …

The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. …

Preventing Deflation
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending…

Fiscal Policy
Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. …A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money. [/INDENT]

I think that’s roughly what I had in mind. Milton Friedman (1968) used the helicopter drop as part of a charming thought experiment, intended to explain monetarism to a lay audience:

[INDENT]III. Effects of a once-and-for-all change in the nominal quantity of money

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

To begin with, suppose further that each individual happens to pick up an amount of money equal to the amount he held before, so that each individual finds himself with twice the cash he had before.

If every individual simply decided to hold on to the extra cash, nothing else would happen. Prices would remain what they were before, and income would remain at $10,000 per year. The community’s cash balances would simply be 10.4 weeks’ income instead of 5.2.

But this is not the way people would behave… [/INDENT] I have to chuckle. Friedman really didn’t need to present the rather vivid image of money flying out of helicopters to get his point across. But I’m glad he did: the example rocks.

#20

I really don’t see that. The idea is to apply combined fiscal and monetary stimulus until aggregate demand grows at the desired pace and you are out of the liquidity trap.

Careful. If folks think they will receive $1000 per year they will consume more of it. If they think the $1000 is a one off event they will tend to save it. That’s why temporary tax cuts stimulate the economy less than ones that are perceived as more permanent.

Their fundamental problem is a lack of aggregate demand and the difficulty of increasing inflationary expectations after so many false starts.

Economics isn’t a morality play. During WWII we massively increased spending on nonproductive items like bombs, bombers and tanks. It still lowered unemployment.

There are some problems that can’t be solved with an aggregate demand push. Long run productivity growth is arguably one of them (with caveats for hysteresis and the like). It would follow that long run wage growth would be another.

You offered no substantiation of this point. Though actually I think you’re correct: apparently there were periods in the 19th century with deflation and economic growth. One can imagine deflation occurring during times of prosperity. The trap comes in when you have a downturn alongside deflation: at that point conventional monetary policy has sharply reduced effectiveness. I still consider myself a deflation hawk, but that’s partly a confession of bias.