To je post za makroekonomiste. Eric Lonergan (ki je skupaj z Markom Blythom v Foreign Affairs lani propagiral uvedbo helikopterskega denarja “Print less but transfer more“) razpravlja o tem, kako je odkril Pigoujev “premoženjski efekt” v povsem drugi obliki, in sicer prek helikopterskega denarja, ki ga centralna banka razdeli vsakemu posamezniku. To pa je odkril prek Miltona Friedmana (njegov AER predsedniški nagovor leta 1968), ta pa prek Gottfrieda Haberlerja. Ali drugače povedano, vse potrebno znanje glede neučinkovitosti standardne QE (prek odkupovanja obveznic) in učinkovitosti helikopterskega denarja, ki poveča premoženje gospodinjstev, je bilo tukaj že 50 let nazaj.

I was taught to dismiss the Pigou effect. Arthur Cecil Pigou (or “Pig” if you believe spell-check) was a great Cambridge economic theorist, known to most of us as the object of Keynes’s repeated ridicule in the General Theory.

The effect that bears his name evolved in response to Keynes, and in particular the idea of a liquidity trap. Keynes argued that not only do depressions occur in the real world of sticky prices and wages, but even in a world of fully flexible prices there could be an equilibrium of high unemployment, something sadly forgotten by much of modern macroeconomics (Roger Farmer is a notable exception). Pigou challenged this claim in the abstract – and with the preface that his argument had little practical relevance – arguing that if the stock of money is fixed in nominal terms, deflation could generate positive real demand growth through a real wealth effect.

If students of economics hear anything about the Pigou effect these days, it is likely to be written-off as “irrelevant”. Money is a small share of total wealth; and as Kalecki counter-argued, deflation also causes the real stock of debt to rise.

Now whenever a monetary aggregate is involved, it matters how you define “money” – and theorists are rarely clear on this. If we are talking about deposits (a significant component of household wealth), their nominal value is not at all stable in a deflation – if defaults are widespread and banks fail, deposits (which are loans to banks) can also be defaulted upon. For these reasons among others, Pigou typically gets short shrift.

The last time I thought about the Pigou effect was in analysing QE in Japan in the early 2000s. It struck me that if we limit the discussion to the monetary base – the real value of which definitively does rise during deflation – its effect on demand depends on how much is created and who holds it. My reasoning was as follows: If banks hold reserves at the central bank, the real value of which goes up during deflation, this will hardly impact consumer spending. Consumers might hold some equity in banks, but in deflation all the other assets of the banking sector will be impaired, so overall bank equity values will decline – as they did in Japan. There is no beneficial wealth effect for households.

But what if households held all the base money, and furthermore the amount was increased dramatically? Surely then a Pigou effect would be large. This line of reasoning in fact pointed me towards cash transfers (as I argued in the FT in 2002).

I was reminded of this line of reasoning when recently re-reading Milton Friedman’s 1968 AER presidential address. It is famous for its critique of the Philips curve. Reading it today, it is far more interesting for its perspective on Keynes – presenting a much more interesting perspective than that of today’s “New Keynesians”.

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Haberler does indeed have a fascinating take on the Pigou effect, which are similar to my thoughts on Japan. In his brilliant article, written in 1952, Haberler is crystal clear on the fact that wages and price in the real world are sticky, but that this is not the crux of the argument. More relevantly, and in the section Friedman was clearly referring to, he says:

“The importance of the wealth-saving relation goes beyond the case usually designated by the Pigou effect, viz., beyond the effect of an increase in the real value of cash balances and government bonds due to falling prices. Suppose the quantity of money is increased by tax reduction or government transfer payments, government expenditures remaining unchanged and the resulting deficit being financed by borrowing from the central bank or simply printing money [he adds a footnote, which Friedman lifted without direct attribution: ‘Open market operations are different, because they result merely in a substitution of one type of asset for another.’]”

He goes on to say, “… consumption and investment expenditure will increase when the quantity of money grows. I find it difficult to believe that this might not be so.”

So do I. And I think its pretty clear that so did Milton Friedman – he says as much in his reference to Haberler’s argument in his 1968 presidential address. What Haberler is describing is either tax cuts or cash transfers financed by base money – and Mark Blyth and I thought we were on to something new! The only unaddressed issue is an institutional one: does it require coordination with fiscal authorities, or – as Mark and I recommend – let the central bank do it directly.

I concluded in a previous post that Keynes had already answered all the major problems in macro policy-making, but maybe today’s challenges require new thinking. I’m not so sure, now. I am increasingly convinced that the academic discussion of monetary and fiscal policy from 1930 to 1970 was far more useful, interesting and subtle than most of what I read currently. That’s not in-of-itself a bad thing – it’s publicly available and by-and-large better written too.

What we need to do faced with a shortfall in global demand is in fact blindingly obvious – global tax cuts, or better still cash transfers, financed by central banks. Friedman thought so, and so it appears did Gottfried Haberler – an Austrian economist. Could someone please whisper this in Ben Bernanke’s ear … he would have something much more interesting to blog about.

Vir: Eric Lonergan