Fed Fiscal Policy, Treasury Monetary Policy

Don’t miss this post by Scott Fullwiler at New Economic Perspectives.

Fullwiler is reacting to Clive Crook’s Bloomberg column advocating “helicopter drops” (having the Fed simply send checks to households). Helicopter drops or “helicopter money” proposals are widely cast as monetary policy operations (Crook describes helicopter money as a monetary-fiscal “hybrid”) and defended as either preferable to fiscal stimulus or as the only remaining option in light of political obstacles to increasing government spending (to wit, the GOP Congress/Dem White House combination).

For Fullwiler, this way of framing helicopter money is problematic — and relies on a skewed understanding of our policy options:

I find it completely counterproductive to have a theory of macroeconomics in which we define fiscal policy and monetary policy based on who is acting. If the US Congress and Treasury choose to send $1 trillion to households without raising taxes, it’s called fiscal policy. But if the Fed does the exact same thing, it’s apparently called monetary policy. I think this only confuses our understanding of the macroeconomic policy mix and makes it more difficult to have an economics profession that can give good policy advice.

[…]

It seems much clearer to simply say that (a) the act of creating a deficit—raising the net financial wealth of the non-government sector—is fiscal policy, and (b) the act of announcing and then supporting an interest rate target with security sales (or purchases, or interest on reserves)—which has no effect on the net financial wealth of the non-government sector—is monetary policy. In the case of (a), whether the Treasury or the Fed cuts the checks, it’s fiscal policy, and with (b), whether the Treasury or the Fed sells securities, it’s monetary policy.

In other words, fiscal policy is about managing the net financial assets of the non-government sector relative to the state of the economy, and monetary policy is about managing interest rates (and through it, to the best of its abilities, bank lending and deposit creation) relative to the state of the economy. This is in fact how Randy Wray explained both in his 1998 book; it’s also how Warren Mosler explained them in his 1996 paper. That is, from the beginning, MMT has labeled monetary and fiscal policies by their functions, not by who was doing what.

I think this is a much more useful taxonomy because it makes clear from the start that (1) the currency-issuing government isn’t constrained while (2) the interest rate on the national debt is a policy variable. All kinds of human suffering the past 6+ years may have been avoided if those two basic points were widely understood.

Read it.

Fullwiler spoke at the last Minsky conference on issues related to central bank operations (actual, vs. textbook): you can hear his remarks here; slides here.