Archive for May, 2016

Of Voices in the Air and Never-Ending Dreams of Helicopter Drops

Jörg Bibow | May 31, 2016

Confusions about so-called helicopter money (HM) continue unabated. My recent letter to the editor of The Financial Times, titled “’Helicopter money’ is a muddled fiscal policy by another name,” has not met with universal approval. In fact, it seems to have ruffled some feathers and caused some annoyance.

Simon Wren-Lewis is a case in point. In a response to my letter (and a piece in the FT by John Kay) published on the Mainly Macro blog, Wren-Lewis reiterates his concerns that trying to distinguish fiscal from monetary policies is ultimately pointless and that central banks need to have HM in their armory since otherwise delegating stabilization would be dangerously incomplete. Mr. Wren-Lewis is perhaps best known for his selfless efforts at trying to wring any sense out of mainstream macroeconomics – an endeavor that takes a lot of wringing indeed. Another case in point is fellow helicopter warrior J. Bradford DeLong, who re-published Wren-Lewis’s HM elaborations on his own blog with the remark “intellectual garbage collection.” The wisdom of HM is just too obvious to be challenged, it seems.

But first recall here that Bradford DeLong is the supposedly “New Keynesian” macroeconomist who a few years back published a piece titled “The Triumph of Monetarism?” in the Journal of Economic Perspectives, arguing – quite correctly actually! – that New Keynesianism was really muddled New Monetarism by another name. It is also the same new monetarist economist who not so long ago published a piece together with Larry Summers titled “Fiscal Policy in a Depressed Economy,” in which the two argued that the time was right for governments to ramp up their investment spending and not worry about debt. That argument made quite a bit of sense to me at the time – and it still does today, as I suggested in my FT letter.

In any case, I was quite amused when at an event at the Brookings Institution on May 23 Larry Summers proclaimed that: “Helicopter money, hear me, helicopter money is fiscal policy. There is no such thing as helicopter money that isn’t fiscal policy.” That may well be just yet another useless point to make of course. But I will leave it to Messrs. Wren-Lewis and DeLong to do the intellectual garbage sorting of Mr. Summers’ remark.

Moving on, a rather interesting piece was published on VoxEU by Claudio Borio (together with Piti Disyatat and Anna Zabei). Borio’s earlier research at the BIS focused on central banks’ operating procedures. He isn’t someone who can be easily fooled about what central banks are doing or not doing. Furthermore, and this may not be a coincidence, he is also one of those rare cases among monetary economists who clearly identified what I long ago dubbed the “loanable funds fallacy” in Ben Bernanke’s “saving glut hypothesis” (see here). continue reading…


Bibow on Helicopter Money in the FT

Michael Stephens | May 19, 2016

In the Financial Times, Jörg Bibow writes in reaction to an article by Stephanie Flanders on “helicopter money” — the idea of having the central bank directly credit citizens’ bank accounts (or, in the thought experiment, to print bank notes and drop them from helicopters) with the aim of generating increases in consumer spending.

Bibow observes that helicopter money is really just fiscal policy, properly understood, and adds that it is preferable that elected fiscal authorities actually do their job — increase spending — during a period of inadequate demand; perhaps by investing in the “energy infrastructure,” as Bibow suggests.

Read the letter here.


Gexit: The Case for Germany Leaving the Euro

Jörg Bibow | May 18, 2016

The case for or against a British exit from the EU – #Brexit – is headline news. For the moment the earlier quarrel about a possible Greek exit from the Eurozone – #Grexit – seems to have taken the back seat – with one or two exceptions such as Christian Lindner, leader of Germany’s liberal FDP. Most EU proponents are deeply concerned about these prospects and the repercussions either might have on European unity.

Yet, while highly important, neither of them should distract Europe from zooming in on the real issue: the dominant and altogether destructive role of Germany in European affairs today. There can be no doubt that the German “stability-oriented” approach to European unity has failed dismally. It is high time for Europe to contemplate the option of a German exit from the Eurozone – #Gexit – since this might be the least damaging scenario for Europe to emerge from its euro trap and start afresh.

Germany’s membership in the eurozone and its adamant refusal to play by the rules of currency union is indeed at the heart of the matter. Of course, it was never meant to be this way. And it was not inevitable for Europe to end up in today’s state of never-ending crisis that impoverishes and disunites its peoples. I have always supported the idea of a common European currency as I believed that it could potentially provide a monetary order that is far superior to the status quo ante of deutschmark hegemony: the Bundesbank – in pursuit of its German price stability mandate – pulling the monetary strings across the continent. While I have also always held that the euro – the peculiar regime of Economic and Monetary Union agreed at Maastricht – was deeply flawed, I kept up my hopes that the political authorities would reform that regime along the way to make the euro viable.

In this spirit I proposed my “Euro Treasury” plan that would, among other things, fix the Maastricht regime’s most serious flaw: the divorce between the monetary and fiscal authorities that is leaving all key players vulnerable and short of the powers required to steer a large economy like the eurozone through anything but fair weather conditions, at best. Watching developments over in Europe from afar my hopes are dwindling by the day that the failed euro experiment will usher in reforms that could save it. Instead, the likelihood of some form of eventual euro breakup seems to be rising constantly. It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity. It seems increasingly unclear for how much longer pro-European politics will be able to somehow cover up the blunder and hold things together – particularly as politics is turning more and more nationalistic and confrontational everywhere.

The quest for monetary stability in Europe was always about two things: price stability and the absence of “beggar-thy-neighbor” distortions in competitiveness and trade. Monetary stability was seen as a pre-condition for peace and shared prosperity. Today, the eurozone is on the verge of deflation, domestic demand is still below the level reached eight years ago, and unemployment remains extremely high, especially in over-indebted euro crisis countries. How did we get here? And how could #Gexit help? continue reading…


Donald Trump’s Printing Press Sends the Media to the Fainting Couch

Michael Stephens |

Donald Trump generated some breathless commentary last week (perhaps, for once, unjustified) for suggesting, in response in part to those who have pointed out that some of the policies he has pseudo-proposed would enlarge the deficit, that the US government can always pay its bills: “This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK?” (He had also suggested that the government might buy back government debt at a discount if interest rates rise. Dean Baker argues this would be pointless, not disastrous.) Among the responses to these comments were claims that this “money printing” business would, ipso facto, be (hyper)inflationary.

L. Randall Wray spoke to Bloomberg’s Joe Weisenthal about the issue. Wray emphasized that the government always spends by “printing money,” or more accurately, by crediting bank accounts through computer keystrokes. With respect to whether Trump’s purported policies would or would not be inflationary then, the central question for Wray is not whether Trump would or would not have the government “printing money,” but whether the economy would be at full employment. At that point, a government deficit of sufficient size could be inflationary (in other words: “So, yes, deficits do matter, but not for solvency“).

Watch the interview here at Bloomberg:

Weisenthal Wray Interview


A Global Marshall Plan for Joblessness?

Pavlina Tcherneva | May 12, 2016

The corrosive social and economic effects of what have now become ‘normal’ unemployment levels require new solutions, and trade without full employment exacerbates the problem.

Global unemployment is expected to surpass 200 million people for the first time on record by the end of 2017, according a recent ILO study, and limitations of official statistics suggest that the problem is much larger. As conventional measures increasingly fail to produce tight labor markets and jobless recoveries become the norm, economists grapple with this new reality by calling it secular stagnation and by adjusting upwards the rates of unemployment deemed ‘natural’ — but the human, social and economic costs of this growing problem are rarely considered in economic modeling.

The Problem: A Global Unemployment Epidemic

Mainstream economic theory considers some level of unemployment to be ‘natural’ (i.e., unresponsive to policy remedies without creating some other problem like inflation), but it largely ignores the harsh human, environmental, and economic costs of unemployment. In fact, some of the best work on this question comes from disciplines outside of economics.

It’s not hyperbole to note, for example, that unemployment kills. Literally. Research shows that one in five suicides is related to unemployment, and joblessness causes 32–37 percent excess mortality for men. And while for women the impact is less clear, we know that there are robust and lasting negative effects from unemployment on social participation and social capital – all prerequisites for a fulfilling and productive life at home and in the workplace. The deep negative impact of unemployment on individuals’ mental and physical health is well-established. And joblessness has been found to have strong scarring effects on life satisfaction.

The link between crime and unemployment is also well-established. Certain criminal activities vary with the business cycle, and studies have found significant and sizable impact of unemployment on the rates of specific violent and property crimes. The connection between youth unemployment and crime is particularly troubling in the context of the ILO’s findings that 74 million young people are unemployed globally (one third of their overall global unemployment estimate). Other studies suggest that the actual number of jobless youth around the world may be six or seven times the ILO estimates.

Unemployment doesn’t just harm the unemployed. It also harms their children and families. It exacerbates infant mortality, depression, alcohol consumption, and the spread of infectious disease. And joblessness is a root cause of human/child trafficking and global sexual and labor exploitation.

This list only scratches the surface of the insidious effects of unemployment. While the ‘natural’ unemployment rate is embedded in virtually every forecasting model used by government and industry, none of them account for the extraordinary social and economic costs of the epidemic that this ‘natural rate’ actually represents.

The Solution: A Global Marshall Plan for the Unemployed continue reading…