Money-Financed Fiscal Policy

Paul Krugman’s contention that “inflation can be helpful in getting out of a prolonged slump — but that getting that inflation probably requires a combination of loose monetary policy with strong fiscal stimulus” seems like as good a time as any to note that the dichotomy between fiscal and monetary policy ought to be seen as an artifact of institutional setup rather than a fact of nature. If you imagine a dictatorship in which all the different powers of “the government” are subject to the will of Saddam Krugman he could have his minions identify shovel-ready infrastructure projects and pay people to do them with newly-printed money.

Of course we don’t set our government up that way for various pretty good reasons, including the fact that we think too tight a coordination between monetary and fiscal authorities will lead to first political funnybusiness and then inflation. But insofar as the policy goal actually is to push up the price level, this goes to show that a bit more coordination could be a good thing. The point I keep coming back to, however, is what when you’ve got an economy in recession what you’re trying to do is to mobilize real idle resources. The different mechanisms of fiscal policy, monetary policy, exchange rate policy, etc all need to be benchmarked against this concept. What resources do we have that are currently underemployed (vacant houses, young workers, non-college workers) and what policy measures would get them doing something more productive than being unemployed and increasingly frustrated?

Obviously, the United States of America needs to make policy with the institutional setup we have and it’s a good thing that we’re a democracy rather than a dictatorship. But if the administration, the congressional pivot points, and the Federal Reserve Open Market Committee were reasonably united in their determination to mobilize idle resources there’d be nothing wrong with them coordinating their activities. MIT economist Ricardo Cabellero, for exemple, has formulated a proposal for a helicopter drop of money on the Treasury that works as a combined fiscal/monetary measure.