I’d characterize this as fiscal policy as well, since you are selling government bonds to do “stuff” in the economy, rather than just having the Fed print out the money and hand it to people
Do you know what the multiplier on your scenario would be? My gut says it should be pretty high, but I’m not quite sure.
Bernanke seems to think it’s a combination of fiscal and monetary policy.
Actually, I think it would be fairly low. Temporary tax cuts have lower multipliers. Theory says they should be close to zero: observation suggests it is way way above zero. But look at the theoretical argument and you can see that it’s a simplification, best for teaching you about components of the underlying phenomenon. Friedman’s excerpt above gives you a flavor of that.
The advantage of the helicopter drop is that you can set it at any sort of scale you want. You can also rinse and repeat. I see it as something to try after you’ve passed a standard stimulus package. The problem with infrastructure projects is that there a limited number of them to fund at a time. Also large and sudden changes in spending tend to lead to inefficient spot shortages. The helicopter drop would send funds everywhere.
I’m not suggesting it for the US now, though it would have been great in 2010. It’s remarkable that the financial sector received a bailout in 2008-2009 but the public did not. Well, actually the public did benefit from the stimulus package, but I think something more direct would have been appropriate. Also, back in 2010 we had too much private debt. Swapping public for private debt would have made a lot of sense.
Europe and Japan should try it today. They are the ones applying negative interest rates at the moment. Be sure to combine it with explicit nominal GDP and/or 3% inflation targeting though. Otherwise it could be a damp squid.
Economies respond to real interest rates, which are rates after adjusting for inflation. I say that if you are considering negative nominal interest rates, then that indicates your baseline level of inflation is too low. Since I am a cautious man, I’m only advocating ratcheting it from a 2% long run target to a 3% long run target. Arguably it should be higher.
So, for your scenario, let’s take the Fed out of the eqution for a second. Then we just have the US government borrowing from the market and spending the money (by sending it out to people). So, that would be what people usually call fiscal stimulus.
If we put the Fed back in now, and have them buy bonds, then they are just another lender. Which doesn’t change the overall structure of what you’re doing. That’s why I’d still put it in the fiscal policy/stimulus side of things.
When the Fed buys bonds, that’s monetary policy, sure. So, your scenario is using monetary policy on the back-end to facilitate fiscal stimulus on the front-end. But buying bonds is a routine operation, so I wouldn’t characterize it as a helicopter drop. And in that scenario, since the money is going to be paid back to the Fed, we’re not in Friedman’s scenario (at least if I recall his scenario).
Friedman (at least one flavor of him) would have said skip all that and just have the Fed print the money and hand it out without an expectation of payback.
Just to add another twist, if the Fed just gave the money to the government, instead of lending it, then we’d be in helicopter drop territory. In that scenario, the government is just acting as a middle-man to distribute the funds (the government would be the helicopter).
Perfectly acceptable characterization I think. In the end though, terminology doesn’t matter very much.
Well, an implicit implication is the money goes directly into people’s pockets, without reversing out of it by driving up interest rates or some other offsetting policy.
In other news, Ben Bernanke has written a piece on negative interest rates. I find his conclusion a little puzzling. He says that negative interest rates have modest benefits and manageable costs. But he also explains how they could destroy the money market fund industry (MMF). Bernanke notes correctly that institutional money funds will no longer be vulnerable as of this October due to adjusted regulations. But those rules don’t apply to retail money market funds: I don’t see how the latter could survive a negative interest rate policy and I am wary of mismanagement leading to the equivalent of a bank run on MMFs. Details by request.
Bernanke (3/18/2016) “What tools does the Fed have left? Part 1: Negative interest rates”
ETA: Oh yeah. Let me hammer my point home again. The US is probably in recovery but the downturn has gone on for too long in Japan and Europe. It’s time to stop screwing around. Forget about fiddling with dials: pull out the fire hose.
Let’s say Japan does follow your vaguely-described scheme. If it doesn’t work, what precisely would you call for then? Do you know anything about the economic conditions in Japan or Europe?
I read the Economist.
There’s reason to believe it would work. If it doesn’t work, try more of the same. If that doesn’t work, figure out why. But there’s little reason to believe that an economy suffering from a shortage of aggregate demand can’t be fixed with monetary and fiscal stimulus.
Digging deeper, I suppose I would be given pause if there was an argument like, “Your plan won’t work and here’s why. Instead you need to try this.” I would pause, but not necessarily agree. Typically such arguments tend to at best rely on plausible but newly uncovered mechanisms, seemingly generated out of a pre-conceived reluctance to stimulate the economy. Such postures are exactly that - postures. Still, some polite attention is only fair.
One problem with negative interest rates is that they involve a fair amount of institutional adjustment for some fairly weak tea. The benefits from cutting the interest rate from zero to -0.50% are probably similar to the benefits of cutting them from say 3.00% to 2.50%. Such benefits aren’t exactly trivial, but they aren’t large either. I maintain that the introduction of negative interest rates suggests that policy makers are dabbling with policies that are both inconvenient and insufficient for the problem at hand.
There are other ways to encourage spending and inflation. For example, the VAT could be reduced sharply, with a committment to increasing it afterwards by 0.2% per month until it reaches its old value.
But taking a fully contrary position: is part of the problem that some Japanese (and Europeans) are content to lead lives consuming leisure and other cheap things, reducing aggregate demand? (We avoid that in U.S. by inculcating materialism.)
I’d sign off on something like that. The key thing is to commit to higher inflation/higher nominal GDP target.
Only if you think there was a sudden burst in desire for leisure in 1930 and 2008. I’m fairly skeptical about these sorts of explanation. But I would concede that a more generous safety net would lead to a higher NAIRU - or non-accelerating inflation rate of unemployment. In other words, the unemployment rate at which inflation shoots up is probably lower in the US than in Europe. Demographics also affect that trigger point.
More generally, a greater preferences in leisure affect the supply side - think about the longer vacations enjoyed in Europe. And that tends to narrow the mismatch between aggregate supply and aggregate demand. It’s the emergence of mismatch that causes a downturn, ignoring for a moment oil shocks and the like.
I’m not speaking to the aftermath of financial collapse (although lack of work does, pragmatically, lead to valuing leisure 
) but rather to the problems that have been endemic in Japan for a few decades.
And certainly French workers, for example, have opted for short work weeks and long vacations – an improvement in contentment that will show as “poor” GDP performance.
Well they started with a financial crisis due to a collapsed real estate bubble.
I generally think that changes in economies cause sociology rather than the other way around. (Though differences in cultures across countries can explain economic differences.) Still, I have to stress that imbalances between aggregate supply and demand are unlikely to be caused tastes for leisure. Such factors could lead to lower or higher GDP growth. But what we’re discussing here is essentially stimulating the economy to reduce excess capacity. Once those gaps are closed, then attention can turn to the sorts of lifestyle preferences you pointed to.