The Phaserl


Infrastructure Spending and Helicopter Money: Two Hideous Ideas

by David Stockman, DailyReckoning:

The key to restoring Main Street prosperity is not launching an infrastructure financing bank as the Beltway bandits keep insisting and even Donald Trump has advocated.

That will result in waste of capital, malinvestments, reduced economic efficiency and an even more bloated public sector than we already have. The bank that needs addressing, in fact, is the nation’s central bank.

Until the Fed’s massive intrusion in financial markets is eliminated via abolishing the Federal Open Market Committee and government-debt purchases, there is virtually no prospect of reigniting capitalist vigor and growth in the United States.

What that means, therefore, is that a half-trillion-dollar infrastructure spree like the one The Donald pulled out from under his comb-over represents a very dangerous idea. It would add measurably to the $35 trillion of public debt that is already baked into the cake, and put the politicians of the Imperial City knee-deep in the distribution of prodigious amounts of pork barrel.

In fact, they desperately need to get on with the opposite — a painful process of fiscal retrenchment that is unavoidable if national bankruptcy is to be prevented. Worse still, adding to the nation’s monumental debt pile in the face of nominal GDP growth that is stuck under the 3% barrier would be nearly suicidal.

It would raise the ratio of public debt to national income — which is already on a path toward 150% — to even more crushing levels. At the end of the day, Donald Trump knows a lot about debt, and its dangers when it gets out of hand, and almost nothing about the economics of growth and public infrastructure. He should be sounding the alarm about the former.

The public infrastructure crusade, by contrast, is just another Beltway boondoggle of the kind that he has loudly condemned and which have already brought Flyover America to the brink of ruin.

Nor is so-called helicopter money any kind of answer.

“Helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old-as-the-hills rationalization for monetization of the public debt — that is, purchase of government bonds with central bank credit conjured from thin air.

It’s the ultimate in “something for nothing” economics. That’s because those government bonds originally funded the purchase of real economic resources such as labor hours, contract services or dams and aircraft carriers. As a technical matter, helicopter money is exactly the same thing as QE.

But that’s not the real reason why helicopter money policy is so loathsome. The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts.

They would do this by agreeing to generate incremental fiscal deficits — as if Uncle Sam’s current $19 trillion isn’t enough debt — which would be matched dollar for dollar by an increase in the Fed’s bond-buying, or monetization rate. That amounts not only to teaching children how to play with matches; it’s tantamount to setting fiscal forest fires across the land.

There are a few additional meaningless bells and whistles to the theory, but its essential crime against democracy and economic rationality should be made very explicit. It would amount to a central bank power grab like no other because it insinuates our unelected central bankers into the very heart of the fiscal process. Needless to say, the framers delegated the powers of the purse — spending, taxing and borrowing — to the elected branch of government, and not because they were wild-eyed idealists smitten by a naïve faith in the prudence of the demos.

To the contrary, they did so because the decision to spend, tax and borrow is the very essence of state power. There is no possibility of democracy — for better or worse — if these fundamental powers are removed from popular control. Yet that’s exactly what helicopter money policy would do. Based on Keynesian gobbledygook about the purported gap between full-employment or “potential GDP” and actual output and employment, the FOMC would essentially set a target for the federal deficit.

At one level, of course, it is to be expected that the people’s elected representatives would relish this “expert” cover for ever-bigger deficits and the opportunity to wallow in the pork barrel allocation of the targeted tax cuts and spending increases.

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