A recent study by the Blackrock Institute has really confused a lot of people who should know better. A proposal to achieve greater fiscal and monetary policy coordination has been widely misinterpreted as some sort of endorsement of helicopter money. This is extremely odd because the paper is crystal clear that the authors understand the calibration problem with H money and therefore oppose the idea.
The calibration problem refers to the following. Any money-financed fiscal expansion large enough meaningfully to affect the economy in the short to medium-term will almost certainly be intolerably inflationary in the longer-run. Conversely, any money-financed fiscal expansion calibrated to avoid a major inflation overshoot in the longer run will be too small to move the economy in the short run, particularly through the channels imagined by H money advocates. There is no right size for a helicopter drop. And the only way one might “work” would be if it were not needed.
But the H money crowd has again got revved up anyway. I attribute this to three considerations. First, helicopter money enthusiasts are excessively confident that their pet project is coming at some point and see evidence in favor of it even where none exists.
Second, and more to the point of analysis rather than psychology, people naturally confuse how things work mechanically in the first instance with how they work ultimately and effectively. We saw that with QE too. Somewhat amusingly, QE was also wrongly called “monetization” when first a glint in Bernanke’s eye.
Third and most demonstrably, the opening summary of the Blackrock study lets slip some very unfortunate language, which might easily convince the eager skimmer that they are advocating helicopter money when they clearly are not.
I have addressed the practical implications of the implausibility of helicopter money in the United States, at least as a remedy for mere stagnation and lowflation, in other notes, including a longer study produced just three days ago.
Here, I shorten up and narrow that same discussion for a broader audience so that I may join the public debate. To reach a wider audience on this one issue, I will open the website for a week or so. I’ll call it marketing. But I am pretty sure I am right on the substance here, so there is some pride too involved in getting this stuff documented again.
(Addition on September 5: I re-open the website for another week to accommodate anybody coming over here from ISI. Thanks to Dennis for letting me share these thoughts more broadly.)