I was over at a friend’s blog looking at a post he had written on helicopter money. His main thesis is that it is a stupid distraction, so I guess I agree. I would add only that the attack on bureaucrats was a bit gratuitous, even if right, and that the logic of heli money is about demand for — and seniorage on — currency, not reserves. Indeed, that is why the case is so weak: the currency stock is just too small.
But in a rookie mistake, he got sucked into a discussion in comments about whether base money is an asset or a liability. There were several exchanges back and forth on this totally irrelevant bit of semantics. But both the commenter and my friend seemed to be very interested in the question of whether money is an asset or a liability. The commenter thought that the answer to that “question” was central and my poor friend did not offer the proper response: no it ain’t. Instead, he got sucked in. Rookie.
(Also, what is it with these MMT robot trolls? Are they trying to sound EXACTLY as Noah Smith mocks them? Yeah, we get it. Things add up. It is not some huge insight, bro.)
I see this a lot in financial markets commentary. I have written about it a few times and tried to focus on the issue in my post recommending that people avoid “essences.” I would loosely characterize essentialism as the idea that we are better off enquiring into the true nature of a thing than into its likely consequences or effects.
In macro, essentialism is a waste of time. For example, it has ZERO BEARING on what would happen in the world were, say, the Fed to promise to fund a fiscal expansion via monetization, that is by forcing up the path of nominal demand and interest rates, so that additional seniorage on the currency stock pays for, in present value terms, the fiscal expansion.
If you work through the sequencing of what ACTUALLY HAPPENS and do the simple arithmetic involved, it becomes readily apparent that a helicopter drop is implausible in the United States. But this post is not yet another one on heli money. It is about method.
My favorite example of a guy who gets high on essences is Willem Buiter, now of Citibank. He thinks himself pretty hot stuff because he understands the difference between an “inside” and an “outside” asset, as if these are ideals handed down by the gods, reflections of which we mere mortals must try to find in the physical world.
A really egregious example of this was his sarcastic and super confident assertion of essences in the spring of 2008. Please follow this link to the underlying FT article, because the FT is right that one ought not just cut and paste others’ work. But sorry FT, I need to take out an extensive quote to highlight the damage that can be done with bad philosophical premises. I think this is arguably fair use. And to repeat, it is from the spring of 2008.
The sky must surely be falling on the financial sector. Reported or estimated subprime related losses have, since last summer, gone from $50bn, to $100bn, $200bn, $400bn, even $800bn. Let’s call it $1 trillion, or even $2 trillion, just to be sure we catch most of the likely eventual losses. What has not been reported is the matching subprime-related gains, which without a shadow of a doubt also follow the sequence $50bn, $100bn, $200bn, $400bn, $800bn, $1 trillion and $2 trillion. Why this failure to report the subprime-related gains?
One reason, no doubt, is that there is a lot of ignorance and stupidity around – the distinction between inside and outside assets appears to be a difficult one for economists, especially financial specialists, brought up in a partial equilibrium tradition. I am lucky in having had Jim Tobin as my PhD adviser and mentor. Balance sheet constraints, budget constraints, Walras’ Law, adding up constraints – it was the bread and butter of what he taught. A little general equilibrium does go a long way.
Yeah, it went a long way, all the way to a sequence of major policy errors and a global depression. (Full disclosure: I also missed 08.)
There are two things that strike immediately about this. First, Buiter was really barking up the wrong tree there with his fixation on the difference between an inside and an outside asset. In 2008, the question turned on the relative importance of the gains and losses and not on semantics or essences.
Second, Buiter is now a huge and super confident advocate of helicopter money and is again lecturing us on our need to understand the difference between an inside and an outside asset. You see, when the Fed prints money, that is an asset to those who hold it but it is not “really” a liability of the Fed, because it need never be matured.
So good to know! And utterly irrelevant to the actual question at hand.
Practically, speaking, the Fed’s asset is the present value of the seniorage it can make on printing the currency, as Buiter — to his credit — has pointed out on other occasions. The income on that asset is the Fed’s seniorage and there are really important practical implications to trying to manage the flow of that seniorage. Let’s consider those implications directly! This requires following the sequencing and applying third grade arithmetic.
In contrast with essentialist nonsense, here is a nice description of philosophical pragmatism from the Internet Encyclopedia of Philosophy, surely an authoritative source! If you read nothing else from me this month, please read this. I bet it will actually help clear up some, not all, confusions in macro
Pragmatism may be presented as a way of clarifying (and in some cases dissolving) intractable metaphysical and epistemological disputes. According to the down-to-earth pragmatist, bickering metaphysicians (ed note: or economists!) should get in the habit of posing the following question: “What concrete practical difference would it make if my theory were true and its rival(s) false?” Where there is no such difference, there is no genuine (that is, non-verbal) disagreement, and hence no genuine problem.
This method is closely connected to the so-called “pragmatic maxim,” different versions of which were formulated by Peirce and James in their attempts to clarify the meaning of abstract concepts or ideas. This maxim points to a broadly verificationist conception of linguistic meaning according to which no sense can be made of the idea that there are facts which are unknowable in principle (that is, truths which no one could ever be warranted in asserting and which could have absolutely no bearing on our conduct or experience). From this point of view, talk of inaccessible Kantian things-in-themselves—of a “True World” (Nietzsche) forever hidden behind the veil of phenomena—is useless or idle. In a sense, then, the maxim-wielding pragmatist agrees with Oscar Wilde: only shallow people do not judge by appearances.
Moreover, theories and models are to be judged primarily by their fruits and consequences, not by their origins or their relations to antecedent data or facts. The basic idea is presented metaphorically by James and Dewey, for whom scientific theories are instruments or tools for coping with reality. As Dewey emphasized, the utility of a theory is a matter of its problem-solving power; pragmatic coping must not be equated with what delivers emotional consolation or subjective comfort. What is essential is that theories pay their way in the long run—that they can be relied upon time and again to solve pressing problems and to clear up significant difficulties confronting inquirers. To the extent that a theory functions or “works” practically in this way, it makes sense to keep using it—though we must always allow for the possibility that it will eventually have to be replaced by some theory that works even better. (See Section 2b below, for more on fallibilism.) An intriguing variant on this theme can arguably be found in Popper’s falsificationist philosophy of science: though never positively justified, theories (understood as bold conjectures or guesses) may still be rationally accepted provided repeated attempts to falsify them have failed.
You may not like these thoughts because they are philosophical! You consider yourself more practical than to get bogged down in philosophy. But I assure you that you are bogged down in philosophy, and it is up to you to choose the right one — or ones for each context. You don’t get to choose no choice.
Hell, maybe this is the best endorsement I could make of philosophical pragmatism. Of all the philosophies, it is the LEAST philosophical!