The Bernanke / MMT / Positive Money Form Of Stimulus

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by: Ralph Musgrave

There is a method of implementing stimulus advocated by Positive Money and the New Economics Foundation in their submission to the UK's Independent Commission on Banking, which is very much compatible with the preferred MMT method of imparting stimulus. Plus, Ben Bernanke has made approving noises about this form of stimulus. Hence the above phrase "The Bernanke / MMT / Positive Money (BMP) form of stimulus."

I've actually explained this form of stimulus a dozen times before and am getting tired of doing so, so the purpose of this article is to spell out the details so that in future I can simply refer to and/or link to this explanation rather than type out the same five hundred words or so for the umpteenth time. So here goes.

Stimulus BMP style consists of simply having the state print money and use that new base money to boost public spending and/or cut taxes. Note that that form of stimulus is part monetary and part fiscal in that the private sector's stock of base money rises plus the fact of cutting taxes or boosting public spending falls into the "fiscal" category.

As to how to actually organise BMP, Positive Money makes it clear that the way to do it is to have some sort of independent committee of economists decide the size of the deficit (i.e., the amount of money printing), while politicians retain control over what are clearly political decisions, like what proportion of GDP is allocated to public spending and how that is split between education, law enforcement and so on.

The latter "independent committee" could be based at the central bank, though it doesn't have to be.

So to summarise, BMP consists of the latter committee deciding on the size of the deficit and instructing politicians to then get a move on and actually spend that money or cut taxes.

As Ben Bernanke* put it, "A possible arrangement, set up in advance, might work as follows: Ask Congress to create, by statute, a special Treasury account at the Fed, and to give the Fed... the sole authority to "fill" the account, perhaps up to some prespecified limit. At almost all times, the account would be empty; the Fed would use its authority to add funds to the account only when the [Fed] assessed that a [helicopter drop] of specified size was needed to achieve the Fed's employment and inflation goals.

Should the Fed act, under this proposal, the next step would be for the Congress and the Administration - through the usual, but possibly expedited, legislative process - to determine how to spend the funds (for example, on a tax rebate or on public works)."

The latter Bernanke system is very much in line with Positive Money's. As to MMT, MMTers tend to advocate what might be called "print and spend" but tend to be vague (unlike Positive Money) on the administrative set up that brings about "print and spend."

Having suggested there is no problem in principle with BMP, that's true in that there is no technical or economic problem, but there is, of course, a political problem, especially in the US, in that politicians like having a say in how much taxes are raised by, and by how much public spending should be increased. That problem in the UK is not so bad in that the minister of finance is free to adjust taxes at the flick of a switch.

Persuading politicians they no longer have a right to decide the size of the deficit in the US is, of course, a huge uphill task. But the end result would be an economic decision-making process that made more sense than the existing one. Indeed, it's difficult to think of a worse or more chaotic system than the existing one. For example, during the recent crisis, it was widely accepted that the deficit was not big enough. But now Trump is running a large deficit and build-up of debt for which there is no justification. How much more chaotic can you get? And it's not me that says this is chaos: Paul Krugman says much the same.

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* Title of Bernanke's article, "Here's How Ben Bernanke's "Helicopter Money" Plan Might Work", published by Fortune.