Friday, October 10, 2014

Please! Send the Helicopters!

In the beginning of the Great Recession, George W. Bush responded to the early signs of economic trouble with a "helicopter drop" in the form of lump sum tax rebates to wage earners, which were provided for in the Economic Stimulus Act of 2008. The bill was signed into law on February 13, 2008 — with support from both the Democrats and the Republicans. Most taxpayers received a rebate of between $300 to $600 per person (based on adjusted gross incomes from 2007) — and eligible taxpayers also received an additional $300 per dependent child. The rebates were phased out for taxpayers with adjusted gross incomes greater than $75,000. The total cost of this bill was projected to be $152 billion.

Quantitative easing (QE) is another unconventional monetary policy used by central banks to stimulate the economy. Before the onset of the Great Recession in 2007 (and before the housing and stock market crashes), the U.S. Federal Reserve only held a fraction of what it does today in Treasury notes (almost $800 billion). But beginning in November 2008, the Fed started buying up billions in mortgage-backed securities. The Fed bought billions in securities every month in what is known as QE1, QE2 and QE3. Because of its open-ended nature, QE3 had earned the nickname of "QE Infinity". Currently the Fed holds a total of $2.7 trillion in federal debt — about what JPMorgan has in total assets.

Additionally, the Federal Open Market Committee (FOMC) announced that it would most likely maintain the federal fund's rate near zero percent — at least through 2015. A Reuters update says that says that for the end of next year, the Federal Reserve's median projection for rates is 1.375 percent; and the end-2016 projection has moved up to 2.875 percent. In an interview with Yahoo Finance, Peter Schiff of EuroPacific Capital says, "I think their plan is to launch QE4, but they can’t come out and admit that, so they’ve been pretending that they’re gonna raise rates."

U.S. Treasury and mortgage-backed securities held by the Federal Reserve from Dec. 2007 to the Present
Debt held by the U.S. Federal Reserve (Oct. 2014)

In June 2013, then-Fed Chairman Ben Bernanke announced a "tapering" of some of the Fed's QE policies (contingent upon positive economic data). He suggested that if inflation followed a 2% target rate and unemployment decreased to 6.5%, the Fed would most likely start raising interest rates. In September 2013, the Fed decided to hold off on scaling back its bond-buying program (This policy is currently being debated, especially since now the Bureau of Labor Statistics reports the "official" unemployment rate as 5.9% and says: "Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment." (September 2014 CPI data are scheduled to be released on October 22, 2014)

New Talk of Helicopters Drops

Lately there's been an interesting and ongoing debate, where some have been arguing: rather than using "quantitative easing" to stimulate the economy, instead, why not use direct cash transfers (like George W. Bush's tax rebates) and give money directly to "people" rather than to "banks" to boost demand and create more spending — regenerating more growth in the economy.

A particular article from the Counsel on Foreign Affairs has recently received a lot of attention: "Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People" (excerpted and edited):

In a story with clear parallels for today, after Japan’s asset bubble burst [during the Lost Decade], its markets went into a deep dive. Government debt ballooned, and annual growth slowed to less than one percent. In 1998, when their economy was shrinking, Ben Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices. (Japan never used that advice, and is still trying to recover.)

VOX recently published an article referencing that article "To fix the economy, let's print money and mail it to everyone":

For the past six years, the Federal Reserve has been trying very hard to get Americans to spend more. First, it cut interest rates so borrowing was easier. When rates got as low as they could go, it tried to pump money into the economy by buying up tons of bonds from people. So far they've bought trillions worth of US Treasury bonds and mortgage-backed securities. And while there's evidence this has all helped the economy grow, the course the Fed chose clearly hasn't been sufficient for a rapid, sustained recovery ... The problem is that people aren't spending enough. So why not just have the Fed give people money to spend?

The idea — known as helicopter drops — has a long history in economics ... John Maynard Keynes and Milton Friedman both endorsed versions of it, but it's most closely associated with former Fed chair Ben Bernanke, who first raised the proposal in the context of Japan's economic malaise in 1999 and repeated it in 2002 as a Fed board member. And the logic behind it is fairly easy even for laymen to understand.

We often talk about what the Fed does to spur the economy as "printing money," but we rarely spell out exactly what that entails. Usually, it means buying up bonds with money the Fed invents on the spot. That increases the money supply, lowers interest rates, and stimulates borrowing ... and used by the Fed to keep interest rates at a certain target. But since the recession, the amounts involved have grown enormously, a policy known as quantitative easing (QE). The Fed has, through three rounds of QE, bought trillions of dollars worth of bonds from financial institutions.

Blyth and Lonergan [at the Counsel on Foreign Affairs] argue the pathways by which QE can be effective are too circuitous. "Low interest rates are simply not stimulating spending, which is what the central bank is trying to achieve," Lonergan says. "Our view is that it'd be much simpler to transfer cash directly. It's simple, it can be quite immediate, and virtually all economists would agree that it would have a material impact on spending."

They argue that the Fed should take the money being used to buy bonds and use it instead to finance checks sent to every household. They'd either make grants of identical size to everybody, or, preferably, larger ones for people in the bottom 80 percent of the income distribution. "Targeting those who earn the least would have two primary benefits," they write. "For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality." The plan, they argue, would require much less money than quantitative easing does to be effective: "Print Less but Transfer More," as their Foreign Affairs headline has it. (Continue reading the full VOX article here and a case against "helicopter drops".)

As VOX noted in their article, the idea of "helicopter drops" isn't inherently a left-wing or right-wing idea, and the ideological diversity of their supporters is one of its most intriguing aspects of this proposal. Recently from the National Review, also referencing that same article by the Counsel on Foreign Affairs:

Those who are drawn to Blyth and Lonergan’s approach on egalitarian grounds might object to such a universal transfer, but they shouldn’t, as it is an alternative to the far more inegalitarian quantitative easing approach, the main effect of which is to prop up asset prices ... The chief benefit of helicopter drops is that instead of propping up asset prices (and bailing out big banks and business enterprises) ... they mitigate the consequences of macroeconomic volatility upon the people. While quantitative easing and bailouts disproportionately benefit the asset-owning rich, helicopter drops leave the household income distribution untouched, leaving the question of redistribution to lawmakers. And Blyth and Lonergan appeal to legitimate concerns about the scale of asset purchases by noting that the cash transfers they envision would be modest in comparison:

There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, helicopter drops would require the banks to print much less money. By depositing the funds directly into millions of individual accounts — spurring spending immediately — central bankers wouldn’t need to print quantities of money equivalent to 20 percent of GDP.

The argument for bank bailouts is that they are necessary to prevent a catastrophic deflationary collapse. Yet direct transfers to individuals can do that just as well, if not better. And so banks can be allowed to fail, clearing the ground for new banks to emerge in their place. If Blyth and Lonergan are seeking to build a broad coalition for their proposals, and I think they are, pressing the case against bank bailouts would be a good place to start.

From Aljazeera, "Real Money Matters":

Since November 2008, the Fed has pumped roughly $3 trillion into the economy, and two-thirds of it is sitting in the Federal System earning interest for big banks. The majority of the funds created by QE are gathering dust in the Federal Reserve System as excess reserves over and above what commercial banks are required to hold to protect against loan defaults. Excess Reserves of Depository Institutions have exploded from $267 billion in October 2008 to $2.2 trillion in September 2013. Banks aren’t willing to lend the money out or because there simply isn’t the demand for the loans that could be created. Either way, the banks don’t have to lend excess reserves to realize a return because the Federal Reserve pays 0.25% interest on them.

From the Wall Street Journal (Andrew Huszar): "Confessions of a Quantitative Easer":

I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Some people have wondered why ordinary people can't go to the Fed window and get the same low interest rates as the commercial banks. And there are those who believe this cash transfer to "people" instead of commercial banks might be a guise to Socialism; but consider this paraphrase of an old quote: "Under capitalism, man exploits man. Under socialism, it is the other way around." In a sense, the U.S. already uses a form of Socialism. It's called "crony capitalism".

Some people believe that our modern world began when Queen Elizabeth I granted a company of 218 merchants a monopoly of trade to the east of the Cape of Good Hope (near the southern tip of Africa). From the Economist: The Company that Ruled the Waves: "The East India Company foreshadowed the modern world in all sorts of striking ways. It was one of the first companies to offer limited liability to its shareholders. It laid the foundations of the British empire. It spawned the 'Company Man'. And it was the first state-backed company to make its mark on the world [with crony capitalism]. "

From Stumbling and Mumbling (excerpted and edited) "Free Markets need Socialism":

Of course, there's nothing new about state support for business: remember the East India Company? But it could be that there is especial need for it now. In a time of slower technical progress and a dearth of monetizable investment opportunities, capitalism cannot generate sufficient profits under its own steam. Instead, it needs the state to create them by outsourcing, privatizations, bailouts and tax credits wage subsidies. What's more, there are huge pressures on politicians to give business what it wants ... This poses a question. Given these structural tendencies for capitalism to degenerate into cronyism [e.g. crony capitalism], could it be that some form of market socialism would do better? [e.g. competitive socialism. See: Markets not Capitalism] Could it be that, if you are serious about wanting a genuinely free market economy, then you must advocate not capitalism but socialism?

In a genuinely free market economy, capitalism does require some Socialism. The following two articles might better explain why: "Capitalism Requires Government" and "Free Markets are Fraudulent Markets".

Excerpted from "Cash Transfers vs. Quantitative Easing" (also referencing the article by the Counsel on Foreign Affairs):

Rather than having the Federal Reserve create billions/trillions of dollars of new digital dollars out of thin air and "loaning" this new supply of money (M-1) to the commercial banks (who might only reinvest in U.S. Treasury bills and pay themselves huge bonuses), let's take all that new money and create debit cards for $10,000 each* and mail them to every single working-age American citizen with a Social Security number to spend as they wish within the U.S. to create more consumer demand — which in turn will require more supply, which in turn will create more jobs. After the labor pool has absorbed the bulk of the unemployed, we can increase immigration to fill any open jobs — and create yet more demand.

When Paul Krugman recently defined "secular stagnation" as an underlying change in the economy (such as slow growth in the working-age population) he said that it's not the same thing as a slow growing of economic potential, although that might also contribute to secular stagnation (by reducing investment demand as opposed to consumer demand]. He says, "It’s a demand-side, not a supply-side concept".**

* Total cost: Est. $1.6 trillion based on the number currently reported by Social Security as "wage earners" (est. 154 million), and those who are currently reported as "unemployed" (est. 9 million) and those who are "not in the labor force" — but also "want a job" (est. 6 million) — TOTAL: 169 million X $10,000 = $1.6 trillion ... less than current QE, and that money won't be hoarded ("saved"), but will mostly be spent in consumption. (Note: Also, when purchases are made, a portion of state tax would apply, also generating more revenues for state budgets as well.)

** This post does not address Krugman's opinion on quantitative easing; nor does it address the problem of demand if it's only being supplied by those who offshore jobs; nor does it address the billions spent on mergers and acquisitions, rather than raising domestic wages --- More reading: The Simple Analytics of Helicopter Money: Why It Works – Always.

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