For the past seven 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.
So Brown political economist Mark Blyth and hedge fund manager Eric Lonergan are proposing another way to go about things in Foreign Affairs. The problem is that people aren't spending enough. So why not just have the Fed give people money to spend?
Dropping money from helicopters
The idea — known as helicopter drops — has a long history in economics. Lonergan notes that 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, thus improving the economy. Usually, the amounts involved are very small, 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.
The hope is that will lower interest rates in the long run still further, and shore up confidence in financial markets that the Fed isn't going to let the economy fall into recession again. But Blyth and Lonergan 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."
Blyth and Lonergan would 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.
Cash without Congress
Cash transfers are usually thought of as fiscal policy, since they're usually implemented as part of the general taxing and spending process that parliaments and other legislatures engage in. Blyth and Lonergan would grant some of that spending power to central banks. This idea has been around for a while, in various forms. Princeton economist Alan Blinder proposed establishing a value-added tax (VAT) and having a Fed-like board set its rate as a way of taking fiscal policy away from Congress and giving it to experts.
Blyth and Lonergan's version of the idea has a few benefits. For one thing, combining spending with money printing is likely more effective than doing just one or the other. But most crucially, central banks can act faster than legislatures. The sluggish pace of the legislative process means action on fiscal policy is often delayed. Blyth and Lonergan's proposal fixes that. "The great strength of monetary policy compared to fiscal policy is that it can be done very very quickly," Lonergan says. "All that's required is a conference call."
It's undemocratic, they concede — but then again, so's the current system. "We live in this bizarre world already where central banks are tasked with everything," Blyth says. "We can philosophically bemoan this fact, and I do bemoan it, or we can accept it and say, if you really want these guys to be the last economic institution standing, give them the tools they need."
Lonergan adds that in an important way, giving people cash rather than spending on bonds is more democratic. Whereas today, European Central Bank chief Mario Draghi is "trying to force businesses and households to borrow and force savers to take on risks they don't want to take," under the helicopter drop proposal "spending decisions [would be] decentralized to households."
The case against
Perhaps the most persuasive argument against Blyth and Lonergan is that the Fed doesn't actually need new tools. Economist Scott Sumner has argued that the Fed could have completely prevented the Great Recession by using its normal powers to implement nominal GDP targeting, a proposal in which the Fed attempts to keep the non-inflation-adjusted size of the economy growing at a steady rate by inflating when growth is slow and reducing inflation when it's fast.
Michigan economist Miles Kimball has argued that the Fed could use electronic money to set negative interest rates, enabling it to use the same tools it uses in normal times in cases where interest rates are close to zero. Johns Hopkins' Laurence Ball has called for raising the inflation target from 2 percent to 4 percent, to make it less likely that we'll hit a nominal interest rate of zero. The Peterson Institute's Joe Gagnon has argued that the Fed should just buy even more bonds, that there's "no reason to think that there’s any limit to the effectiveness of quantitative easing … They've just been too timid."
So why not adopt one of those plans? For one thing, Blyth and Lonergan express skepticism that Fed communications can do much of anything to improve the economy, something that Sumner and Ball's proposals in particular rely upon. "A lot of the alternative proposals seem to say that the central bank can just wave a magic wand and hit a higher level of inflation," Lonergan says. "If the central banks have a lot of other tools, I'd quite like to know what they are." There's also the appeal of their plan's distributional impact, as it would help lower-income households more in percentage terms even if all households got an identical transfer. By contrast, there's no reason to think traditional monetary policy would have a large or predictable effect on inequality at all.
In any case, they argue the plan's very simplicity is a major virtue compared to more complicated idea like the ones above. "All of these are complicated devices to increase spending. If you want to increase spending, just do it in the simplest way," Lonergan says. "It's almost as if the opposition to helicopter drops lies in its simplicity. There's an intellectual vested interest opposed to the idea, because if it's shown to work, people will rightfully say, what on earth have you been doing?"
Another counterargument is that helicopters amount to a government giveaway, or that it's unfair for the central bank to give people money they haven't earned. "Capitalism embodies an ethic that you must earn your crust, and if you create an economy whereby the crust is there without being earned, it's deeply disturbing on some political, ideological, and moral level," Blyth notes. But Lonergan notes that in a way, helicopter drops are more fair than conventional monetary policy, which necessarily tilts the balance between savers and borrowers. "We're not discriminating, or if we are, it's toward people with lower incomes," he says. "But we're not saying people who've borrowed money deserve something for nothing and people saving money should be arbitrarily penalized."
Intrigued? Be sure to check out the full transcript of my, Lonergan, and Blyth's conversation by toggling here. Be sure to also check out Reihan Salam's discussion of the idea at National Review. While Blyth and Lonergan are both lefties by orientation, the idea isn't inherently left-wing or right-wing, and the ideological diversity of its supporters is one of its most intriguing aspects.
Dylan Matthews: For people not familiar with the idea, what is a helicopter drop, and how is it different from what central banks usually do?
Eric Lonergan: The idea of helicopter drops is to allow central banks to transfer cash directly to the bank accounts of households. It's an extremely simple policy idea. Very similar ideas have been recommended by economists from across the political spectrum, as diverse as John Maynard Keynes, Milton Friedman, and Ben Bernanke in the early 2000s, when he was giving advice to the Japanese. The essential idea is extremely simple, which is to grant central banks the power to transfer cash directly into bank accounts.
How does that differ from what they're doing currently? In some ways it doesn't really differ, since when they cut interest rates, they are effectively transferring cash within the economy. People who have savings and are earning interest income see a decline in that income, and effectively there's a transfer to people who have or are taking out loans.
The beauty of the helicopter drop is that there's a very high probability of success. Households will either use the cash to repay debt or spend it, and it doesn't matter which of those two choices they take. The other thing is that interest rates are so low that they have stopped having much of an effect on the economy.
The problem with what central banks are doing currently is that they're trying to force two constituencies to behave in ways that they don't want to behave. They're keeping rates very low to induce people to borrow more money, when firms and households are very reluctant to borrow any more money. Low interest rates are simply not stimulating spending, which is what the central bank is trying to achieve. On the other hand, there are people saving money and central banks are trying to encourage them to take more risks and spend more money, and they don't want to do that either.
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.
Mark Blyth: It's helpful to see it in comparison to three other policies which have been proposed. In the Eurozone, the conversation has moved from fiscal austerity to what's called "structural reform," and structural reform is probably a good idea if you have Italian labor markets or Spanish product markets or whatever. But doing it during a recession makes things worse before they get better. Given that things have been bad for some time, that's a tough one to keep going.
The other one is infrastructure spending, which we think is a great idea, and America could use tons of it. It's not clear Europe needs that much, because the infrastructure is quite good in some cases, but more importantly, this isn't the 1930s. You can't just send people out to build the Hoover Dam. Everyone in Colorado would be filing petitions to stop the digging. In terms of economic stimulus, infrastructure, while important, it doesn't really have that immediate an impact.
The third one is quantitative easing (QE), which is when the central bank buys assets like mortgage-backed securities or sovereign bonds and swaps them out for cash. The analogy I like for this is that it's like trying to water the garden with a firehose that you've plumbed through a drinking straw. Most of what goes out of the hose is wasted, and only a trickle comes out. You spend a lot for little bang for the buck. Most of it stays in the banks, and it can lead to massive distortions in asset markets. With QE, you're turning the entire financial sector into a big stimulus instrument, which builds up future liabilities. If interest rates rise precipitously in the next few years, there are a lot of people with mortgages in London and Tel Aviv and Oslo and other places that have seen a boom that will be underwater quick.
So not only are helicopter drops a good idea in their own right, but it's a simpler, cleaner alternative to a lot of policies being proposed now.
Dylan Matthews: A fourth alternative you can imagine is fiscal stimulus of a cleaner sort than infrastructure spending — say the Making Work Pay credit in the US stimulus, which was basically just a cash transfer. What's preferable about funding a cash transfer by printing money rather than by increasing the deficit?
Eric Lonergan: There's a couple of ways to think about this. The first has to do with the efficiency of decision-making. One of the problems with fiscal policy is there's no consensus. The different parties within the political system do not agree on the mix of tax cuts, spending, infrastructure — the different components of fiscal policy. There is not a consensus on how to do it best. In fact, the disagreement is quite extreme when you go across economies. The US responded to the recession by easing fiscal policy, and Europe responded by tightening fiscal policy. There isn't even agreement on whether you should ease or tighten fiscal policy.
The second problem with fiscal policy is that it isn't timely. It doesn't work quickly. It gets caught up in the political process, and it becomes hostage to vested interests. The great strength of monetary policy compared to fiscal policy is that it can be done very very quickly. All that's required is a conference call.
We're saying macroeconomics needs to evolve. The current separation of fiscal and monetary policy doesn't work very well. Monetary policy is timely but ineffective. Fiscal policy can be very effective but isn't timely and becomes hostage to vested interests. We're transferring one of those powers to the central bank and allowing them to make cash transfers. We can learn from the history of tax rebates, which are cash transfers by another name. They are known to impact demand and we can measure the effect. We don't know perfectly how well they work, but we have a good idea that they'll have a material impact on the economy.
The final point is a more technical issue, and that relates to the specific way in which it's being financed. What would happen is that central banks would just create money, as they do under QE. But the beauty of what we're proposing, as Mark pointed out, is that because it'd be much more effective, we think they would need to print an awful lot less money than they're printing under QE. The Federal Reserve has printed something like 20 percent of GDP in new money with very little measurable impact on the US economy. We think what's needed in the Eurozone to get something going with helicopter drops is 2 percent to 5 percent of GDP.
Mark Blyth: I would only add one point. Everyone's looking at Europe now, and asking, "What's Mario Draghi going to do next?" As Eric said, the split between monetary and fiscal policy is a distinction without a difference, but the institutional arrangements honor that distinction, so it matters. We want to eliminate that distinction but as it stands they can't, and so Draghi is being asked to solve fiscal policy with monetary instruments. While you can add lots of liquidity and distort the hell out of markets, but you can't ultimately solve that problem. We think our proposal would be very useful for Europe because it doesn't require the agreement of 17 countries in the Eurozone to coordinate tax cuts. You would simply allow the central bank to drop the money straight into accounts. That would obviate the coordination problem of getting all the countries of Europe with different fiscal preferences on the same table.
Dylan Matthews: One criticism of helicopter drops that Scott Sumner has made very forcefully is that there are tools that central banks have now that they're not using that would make their policies more effective. Sumner says that's targeting nominal GDP, Miles Kimball has a scheme for electronic money, etc. What makes you think the way central banks are set up today is limiting?
Mark Blyth: Let's think about the European Central Bank again. What's Mario going to do? He could do QE but the yields are so compressed that it's not clear to me what that possibly could achieve, other than to have an even greater artificial compression of yields, which, inevitably, when you normalize, will be very very painful.
The other one would be negative interest rates on deposits. He's tried it but it doesn't seem to have done much. In September there's going to be €700 billion of targeted long-term refinancing operations (LTROs) available for banks to lend, but given that the economies you want to do the spending are in massive recessions, it's not clear who's going to do the borrowing. What will happen is the banks will line up and borrow them and buy more bonds, and yields will get more compressed.
Electronic money, possibly, but is Bitcoin a real thing or is it a bubble? We don't know.
What we're proposing is just giving the central bank a very effective tool that cuts through all the distortions, cuts through all the plumbing, and gets it straight into the account. If the problem is that these economies are not growing due to insufficient spending, let's recognize that as a problem of fiscal policy. European governments, for reasons known only to themselves, have decided in the 2012 fiscal pact that fiscal policy should be made illegal and dumped it all on the central bank. In such a world, let's give the bank the tools to do the job.
Eric Lonergan: I would just add to that that if the central banks have a lot of other tools, I'd quite like to know what they are. There are really only two tools the central bank has. One is interest rates and the other is asset purchases. A lot of the alternative proposals seem to say that the central bank can just wave a magic wand and hit a higher level of inflation. There's one set of proposals that says we should raise the inflation target. The problem is that the ECB can't hit its current inflation target. The central banks cannot generate enough demand in the economy with their current tools to get sufficient inflation. The notion that magically announcing a higher inflation target is going to convince people it's going to happen is totally implausible.
We've seen this tried on many occasions in Japan. Nobody thinks the Japanese are going to get an increase in the underlying rate of inflation, because there's been no reason why there's been a sustained increase in demand. If you want them to do even more aggressive asset purchases — if one stands back and thinks about that, what are they trying to do? Draghi was clear on this at Jackson Hole. He said the main burden falls on the central bank to generate demand. That is the main objective of monetary policy. How are they going to do that buying assets? Is it true that if you drive up the stock market, you have a spillover effect into the economy? How sustainable is that when you have to raise interest rates later on?
These are extreme contortions central banks are going through, either trying to manipulate peoples' beliefs in a muddled way with NGDP targeting, which most people in the population don't even understand, or trying to change the expected rate of inflation, which most people don't even have a belief about. All of these are complicated devices to increase spending. If you want to increase spending, just do it in the simplest way. It's almost as if the opposition to helicopter drops lies in its simplicity. There's an intellectual vested interest opposed to the idea, because if it's shown to work, people will rightfully say, what on earth have you been doing?
Mark Blyth: There was a brilliant piece in 1943 by the Polish economist Michał Kalecki. It was a critique of full employment policy. He said a problem with Keynesian macroeconomics is that if we get away with it, if you have permanently full employment, two things happen. One, job switching becomes costless and employers no longer have the whip hand. There will be a political revolution, employers will find economists who'll say it's unsustainable, and they'd try to overturn it. He wrote that in 1943, and that was basically the neoliberal revolution foretold.
Two, capitalism embodies an ethic that you must earn your crust, and if you create an economy whereby the crust is there without being earned, it's deeply disturbing on some political, ideological, and moral level. The other thing, besides the vested interest of employers in stopping full employment, is the idea that there must just be something wrong with doing this. Deep down inside, many people refuse to accept something simple: central banks, in a fiat money system, are just printing. There's no corresponding liability besides the balance sheet convention of listing cash as a liability. There's nothing claimed against anything else like gold. All that matters is the credibility of policy — that the place is reasonably well-run — and that you have the intergenerational ability to tax. If you have both of these things, you're just printing. So instead of printing it, shoving it through the banking system and hoping some of it trickles down after it's blown the stock market up to 15,000, why not just give people the cash?
Eric Lonergan: People have this very strong feeling that you shouldn't get something for nothing, and that this is intrinsically an immoral suggestion. I want to completely turn that on its head, because I think this is the fairest policy from that perspective. What happens currently is the Federal Reserve either raises or cuts interest rates. Currently, they've been cutting interest rates very, very aggressively. What does that do? That effectively gives people who have borrowed a lot of money something that they don't deserve. There's an inherent injustice in randomly saying, "I'm going to penalize people who save money and benefit those who borrow money."
We're much fairer than that. We're not discriminating, or if we are, it's toward people with lower incomes. We're saying, as a political judgment, if you want to do something about inequality, you can skew this toward the end of the income distribution. But we're not saying people who've borrowed money deserve something for nothing and people saving money should be arbitrarily penalized. We're treating all individuals equally.
Dylan Matthews: Helicopter drops take something that has traditionally been the province of elected officials and assigns it to a board that, while subject to some democratic accountability, is meant to be independent. You could see people criticizing this for taking spending policy further away from voters. What do you make of that argument?
Mark Blyth: This is something I thought long and hard about, but it bothers me for a different reason. If you follow the discussion of macroeconomics and banking over the past forty years, back to the Ed Prescott and Finn Kydland piece back in 1977 where you have this rules versus discretion thing introduced, you come out of the 1970s and the story about inflation is that it's caused by politicians matching their electoral cycle to the business cycle. Booms and busts become the fault of the government, so we need to take fiscal powers away from them and give it to independent central bankers, preferably conservative independent central bankers. Then we can tell a story about rational expectations and pseudo-free lunches for credibility and you spend the next thirty years building independent central banks all over the planet.
First of all, has economic policy been any better? Has it produced better, wealthier, more equal economies for people? No, it hasn't. Secondly, isn't this astonishingly undemocratic, that over the past 30 years we've been handing central banks these tools? We're already there. We did this quite consciously.
Think about the crisis. The Americans spent, but only because they scared the hell out of Congress. After that, Republicans played gridlock. So now there's no fiscal policy in the US. It just isn't done. In Europe it got even worse. The 2012 fiscal treaty makes fiscal policy borderline illegal in the EU. All the weight is on the central bank. Think about Britain. They're supposedly in recovery. We've got a giant housing bubble and boatloads of foreign cash coming into the economy, primarily into the property sector, but the weird thing is that while the whole place is booming and employment is up, real wages have fallen by 8 percent since 2008. So what is the basis of the recovery if there's less purchasing power in the economy now than there was then?
We live in this bizarre world already where central banks are tasked with everything. We can philosophically bemoan this fact, and I do bemoan it, or we can accept it and say, if you really want these guys to be the last economic institution standing, give them the tools they need. Asset purchases and interest rates are, ultimately, pushing on a piece of string and relying on distortions. Give them a fiscal tool to do a fiscal job and don't worry about the semantics.
Eric Lonergan: The philosophical reservation about central banks having this power is already an issue. The central justification of independent central banks is that the legislature determines the rules that govern their behavior. That would remain the case under what we're proposing. To that extent, one could argue it has democratic legitimacy.
But in one respect, this is a lot more democratic, because spending decisions are being decentralized to households. In a sense, today you have a central planner. In the case of Europe, it's Mario Draghi, and he's trying to force people to behave in a way they don't want to behave. He's trying to force businesses and households to borrow and force savers to take on risks they don't want to take. This lets us say, "No, you don't make the decisions on behalf of everyone else, let's spread the increased spending power across households and across the economy, and we'll let people make decisions that are most appropriate for them."
I think that's a very attractive aspect of this policy that contrasts it with classic Keynesian policies about infrastructure spending or tax changes, or indeed the current set of monetary policy measures. That should be appealing across the political spectrum.
Dylan Matthews: To circle back to a point Mark was making, there's historically been this argument that full employment policy is threatening to the capital-owning class, and that's a political problem for passing this proposal. I'm curious of what you guys think about the political viability of the plan, and what could sustain support for it in the long-run.
Eric Lonergan: First of all, we're a long, long way away from full employment, certainly when you look outside the United States. One can debate the proximity to full employment in the United States, but even in the case of the US, most people would say we're a long way from full employment. In the Eurozone, we're closer to the conditions of the depression. So any political concern that the balance of power will dramatically shift between capital and labor — we're a long way from that.
But there are two points other I'd make about the structure of the world. Globalization, to the extent that we can say anything about it, seems plausibly to have shifted the balance of power toward capital and away from labor. That has two effects which bear on the policies we're describing. There's an awful lot of competition, even at full employment, a sufficient redundancy of certain kinds of employment and creation of new job types. There are certain kinds of frictional costs. People will always need to be working to earn a wage in that sense, because there's the constant uncertainty of technological change and global competition.
The second point I'd make is that the problem is the returns on globalization are coming to capital. This is a root problem in the generation of demand. Capital needs wage growth to generate demand for its goods. The second dimension to what Mark and I are proposing is that governments issue more debt at zero real interest rates and acquire equity on behalf of their population, and distribute it toward the 80 percent of the population which owns very little equity. This creates a better alignment of interests between capital and labor in a world that's globalizing with rapid technological change.
Mark Blyth: I would just add to that — Eric emphasizes you can issue more debt at 0 percent interest rates, and given the politics of debt, it could be negative 5 percent and people wouldn't borrow. The other way to do is to look at all those assets you bought with QE. As the economy recovers, especially in the US, you're going to sell that stuff back to the markets. Why not bank that cash and use it to buy a portfolio of global equities and get an equity upside for the bottom end of the income distribution? It's not just about issuing debt. You can use assets you've already got to buy equities.
To go back to your original question, there's a Churchill line I've always liked, because you can change the ending depending on the situation: "When you find yourself going through hell, keep going." And I think as far as Europe is concerned, when you find yourself going through hell, look for an exit. Europe needs an exit and they keep looking for the ECB to be the exit, and the only way that's going to work is if they get a very strong new policy tool, for the reasons we've outlined. We believe that the proposal we've outlined is that tool. Without that, they're going to keep going through hell. How long, in a democracy, can you sustain levels of unemployment that exceed those of the 1930s?
Dylan Matthews: So that's the second part of this, the proposal to set up a sovereign wealth fund by having the bank buy equities. How connected are these two plans? Do you need to have helicopter drops and a sovereign wealth fund together for it to work, in your view?
Mark Blyth: I would say it's a Chinese buffet. You can have them separately, but it's better to have both on your plate at one time. As I said, the long-term sovereign wealth fund plan reduces the need for helicopter drops in the short run. Let's imagine you fast forward sixty years. You have a return on capital of 6 percent on the fund’s assets (global equities) and a growth rate of 4 percent. You're taking Piketty's r and giving it to everybody. That'd be kind of awesome. If you do that and you get better growth at the bottom, that means more assets at the bottom, less fragility at the bottom, and more growth potential at the bottom. You're less likely to need the short term policy. The two do go together but we'd be very happy if anyone implemented either.
Eric Lonergan: What they have in common is that they're genuine innovations in macro policy, and what's very shocking is how little innovation has been occurring. In the context of the Eurozone, there's a lack of intellectual leadership. Where are the ideas? Central banks are using the same tools they used in the late 1800s. They were set up to initiate government bond markets and provide liquidity to banks, and we move forward over 100 years where they're given responsibility for full employment and price stability, and they're still using the same tools.
When people talk about unconventional monetary policy and quantitative easing, there's nothing new in any of it. You go back to the 1870s, and there were central banks doing exactly that. There's been no innovation. When you look at fiscal policy, it's similarly astonishing that people are having the same discussions they were having 70 or 80 years ago. Why should there not be any progress or innovation in those institutions and policies? Similarly, it is a natural evolution and a logical innovation in policy that we try to broaden equity ownership in the current set of circumstances we face today, which is a global economy with rapid technological change, which has hugely shifted the balance of power toward capital. That can be a very good thing, because you get amazing companies like Google doing incredible innovation, but it's madness for us to not respond to that by redesigning economies in sensible ways that don't crush incentives but broaden the benefits.
Mark Blyth: My God, I've become so disturbingly mainstream. Doug Henwood, responding to our piece, brought the Kalecki point back in, saying that capital would never allow the last part, the sovereign wealth fund, even if you get the first part through. You'd be bringing politics into the board room. My answer is that it's not the government that's ordering it, so it doesn't become a political football. The ownership is in an SPV that belongs to the central bank and it's passively managed.
Some of the emails I've gotten from people have stressed that if you have the fund, the government would take from it when they need it. Well, it's not theirs. They literally can't get it. They could rewrite the constitution to steal money, but really, if you're amending the constitution to steal money from a central bank, we're already worrying about worse stuff. You can see where people get the wrong idea about the politics. People think "what the government gives, the government can take away," but it's not theirs. They may be involved in the creation but they can't take it away. This is particularly important in Europe. You don't need any treaties. You don't need any new agreements. The central bank is allowed to directly give people cash.
Eric Lonergan: I couldn't agree more. I think it's curious when you look at the reaction to these policy proposals globally. If you look at Japan currently, the Bank of Japan is already buying equities, which very reasonably raises the question: why can't they distribute them to the public? We have many instances of this during the financial crisis. Governments — the US government, the British government, across Europe as well — took very large equity holdings in the banks. There's a much bigger risk of interference there but there has been very little evidence of interference, and there's been measured withdrawal of ownership.
There was a huge missed opportunity: I don't think the government should have sold it stake for cash, but distribute those equities to the population. They have already done what Mark and I are proposing: they issued bonds and used that to buy equity and sold the equity back later, but they could have distributed the equity to the population. Why don't we do that? Broaden equity ownership, align the interests of capital and labor, and the government doesn't own it, the household sector does.
Mark Blyth: The other case that comes up is Sweden's wage earners fund. For those of you who aren't Swedogeeks like me, from 1971-74 the trade union and socialist party in Sweden decided to really go for it — "Let's do socialism!" They did this by declaring that multinationals were making excess profits, so they invented an excess profits tax to buy equities, and eventually they'd own all the equities. It was socialism through the stock market.
Unsurprisingly, Swedish capital went mental. Part of it was identity politics. The policy suggested they weren't necessary anymore. But we're not near that. We're not talking about buying companies. We're talking about buying a global index of equities. We'd be like Abu Dhabi's sovereign wealth fund, which has 0.25 percent of everything. The second thing is that you're not raising a tax to do it. Either you're doing it through debt financing at 0 percent or by selling back or using cash from assets you've got. There are many ways to think about the short and long-term proposals that aren't political problems. They only appear to be political programs.
Eric Lonergan: These proposals are confusing for people who want to put policies in very simple boxes. They are as appealing to a Scandinavian view of the world as they are to a Thatcherite view of the world that wanted to create a broader shareholding public through privatization.
Dylan Matthews: It's a tad similar to some Social Security privatization proposals in the US, actually. Most of those don't let you pick and choose stocks, but make you buy into an index fund.
Mark Blyth: Indeed. Bush got his ass kicked over trying to privatize 4 percent of Social Security, because the argument was that it was the thin end of the wedge and really about getting rid of the whole program. But Social Democratic German chancellor Gerhard Schroeder did 7 percent because he got the trade unions to run it. They get the equity upside. What's political about this is the way that we frame it, and how much we trust the other side not to screw it up.
Dylan Matthews: How do you see this playing into the debate happening in the Federal Reserve about financial stability? You have people like former governor Jeremy Stein and current vice chair Stanley Fischer suggesting that we should be concerned about how monetary policy is affecting the state of the financial system as a whole.
Eric Lonergan: Absolutely, we think this would be a huge improvement. You alluded earlier to Scott Sumner and some alternative proposals that are really all about making the current policies more extreme: more negative interest rates, more asset purchases, bigger changes in inflation expectations. There is a very legitimate case that the current policy tools are already reliant on asset price distortions. The transmission mechanism is a kind of financial instability. You drive asset prices to extremes because that's the only way to have a marginal impact on demand. What we're saying is that you could put interest rates closer to normal levels, but make cash transfers directly to stimulate demand. The financial stability point is one in favor of this set of policies.
This interview has been lightly edited for length and clarity..