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Thursday, July 15, 2010

Helicopter Money

I sent an email to Brad DeLong. He gives me more credit than I deserve:

DeLong Smackdown Watch: Mark Thoma: Mark Thoma writes to inquire why I am endorsing a helicopter drop--a money printing-financed mass mailing of tax rebate checks--when a money printing-financed increase in government purchases dominates it from an economic point of view. Aren't I surrendering to the dysfunctionality of our political system rather than fighting it?

Mark Thoma snarks:

I am very simplistic.

When you trade money for bonds, it simply changes the composition of what people have in savings. Before it was bonds, now its cash. No effect on real activity. You need actual demand, or the prospect of it, to create expected inflation.

When you drop money from helicopters, the people who need it most scramble for it, and then rush to spend it before everyone else spends their money and drives up prices (expected inflation) or causes stock-outs. It has real effects. And I don’t think the people willing to fight for $100 bucks when the helicopter comes each day give a damn about future taxes.

But instead of simply dropping it, why not buy something on the first step? Print money, buy labor (the labor then spends the “found”, i.e. earned, money). Print money, buy goods and services. Because this is too slow. Deciding what labor should do, hiring, etc. takes way too much time and political effort, as does figuring out what to buy.

So save this time by just letting the money rain down on people and letting them figure out what to do with it. I’d guess that money falling in a city would begin to see effects on aggregate demand, oh, a matter of minutes, if that long.

But I know this is too simple.

    Posted by on Thursday, July 15, 2010 at 12:15 AM in Economics, Monetary Policy | Permalink  Comments (88)


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