Helicopter Drop Time: Paul Krugman Gets One Wrong

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Includes: DIA, QQQ, SPY
by: Brad DeLong

Paul Krugman writes (Nobody Understands The Liquidity Trap):

[W]hen you have bought so much debt and created so much money that [short-term safe nominal] rates are near zero, the public is saturated with liquidity; from that point on, they’re holding money simply as a store of value, which makes it no different from bonds — and hence a perfect substitute for bonds. And at that point further open-market operations do nothing — they just swap one zero-interest asset for another, with no effect on anything.

So why not forget about open-market operations, and just drop the stuff from helicopters? Well, remember that at this point cash and short-term bonds are equivalent. So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence...

But we don't believe in full Ricardian equivalence. Maybe we would if this year's helicopter drop was to be followed by next year's great helicopter vacuuming, but it isn't. So printing money now--and promising never to buy it back--is a way of having some impact on future inflation, and thus of getting some traction. Moreover, "much or most" is not all.

The "much or most" is, I think, reason to go for money-financed government spending as a preferable policy to a helicopter drop--which is a money-financed tax cut. And it is reason to go for an explicit raising of the Federal Reserve's long-term inflation rate target from 2% to 3%.

But if we are not going to do either of those things--and it looks like we are not--it's time to rev up the helicopters...