In the early stages of the 2016 presidential campaign, Ben Bernanke undertook a three-part essay, “What Tools Does the Fed Have Left?” It appeared on the Brookings Institution site. The economy was growing and creating jobs, the former Federal Reserve chair explained. The recovery, he thought, would surely continue. But at some point “in the next few years,” the economy might slow, he wrote – “perhaps significantly.”
He asked, “How would the Federal Reserve respond in that case?”
The first little essay discussed offering negative interest rates on government bonds. That means the purchaser would be paying for the privilege of lending the government money to be paid back in due course as only slightly less than the sum that was lent. Japan pioneered the practice, only to be back-footed by the virus pandemic. The British government last week sold its first bonds with a negative yield. But under chair Jerome Powell the Fed has already ruled that out as too rough on the banking system.
Bernanke’s second article examined the possibility of targeting long-term interest rates instead of the very short-term ones with which the Fed ordinarily conducts monetary policy. Under depression-style conditions, with short rates so low that there was no room to cut them, the Fed might seek to create a peg – that is, place limits – on two-year. three-year or five-year government bonds, by offering to buy them back at a certain fixed rate, paying more than what otherwise would be their market value, placing a ceiling on their price and yield.
The third essay was about “helicopter money” – that is, a last-ditch policy against stubborn high unemployment that, in its strict form, has never been tried. That essay seemed to me the one especially worth reading, connected, as it is, with the enormous deficits occasioned by the pandemic.
Helicopters have nothing to do with it, of course. Instead money-financed public spending involves balance sheet jiggery-pokery. Suppose the economy is deeply, truly stuck. Congress approves a few trillion dollars – half for public works, half for tax rebates. The budget deficit soars. But the government doesn’t borrow to finance its spending. Instead it prints money. The Fed credits the Treasury’s central bank checking account and the Treasury spends the money to pay for the agreed-upon public works and tax rebates. Jobs are created, household incomes rise, prices climb thanks to the new money in circulation (a one-time surge in inflation, as sophisticated investors believe it will only happen once). The economy begins to climb out of its desperate straits, with no increase in future tax burdens. When he wrote, Bernanke judged it highly unlikely that the measure would be used. With the need to restore confidence in the wake of the shutdown, it seems somewhat more plausible – a little like shooting sulfur particles into the upper atmosphere in hopes of controlling climate warming.
I am in no mood today to write about Big Bazookas, much less TLTROs (targeted long-term refinancing operations) or MFFPs (money financed fiscal programs). I continue to be preoccupied with psychological aspects of the response to Covid-19. Having no fact-based expectation of when it might end is what makes it depressing.
But if you want to read about what helicopter money could mean – and why its distant cousin modern monetary theory is bunk – you can’t do better than to start with Bernanke.
When he first introduced the topic of a helicopter-drop in, 2002, in “Making Sure ‘It’ Doesn’t Happen Here,” the Fed’s press-relations officer advised him to leave metaphor out of his speech. “It’s just not the sort of thing a central banker says,” he was told. Bernanke went ahead, and a good thing too. That was then, when he was one of seven governors, four years before President George W. Bush named him chairman.
They say it now. They just need a better metaphor.
In a report to bulldog subscribers, I wrote a careless sentence the other day. about The National Bureau of Economic Research. The NBER, like Harvard and MIT, I lamented, was shut down. The universities had sent their students home and closed their libraries. But the 1,300 or so research associates of the NBER were already home. That was the point of the 1970s restructuring that turned a productive but slow-moving little research institute in Manhattan into a world-girdling network of university researchers energetically comparing notes with oneanother.
I asked NBER President James Poterba, of the Massachusetts Institute of Technology, how the pandemic has affected operations at “the Bureau” – its Summer Institute, in particular, which ordinarily brings nearly 3,000 economists to Cambridge over a three-week period in July. It was true, he replied, that the NBER had no immediate plan to return to its Putnam Square headquarters, in Cambridge. Otherwise, “shut down” couldn’t be further from the truth. Keeping up in its customary manner of doing business with the changes wrought by the virus had, he said, made the operation feel “on many dimensions, like a fast-growth startup.”
The outpouring of research related to COVID-19 is the most visible change. Including the 21 new papers that will be released early this week, there are now 115 papers in the NBER working paper series that are related to COVID-19. The production of these papers does not seem to have come at the expense of other research. During the last eight weeks, 310 new working papers have been distributed. The same eight-week periods in 2019 and 2018 saw 171 and 188 papers, respectively. Our working paper team is working harder than ever to keep up with this burst of new research activity. Next week we will be releasing 57 new working papers; in a typical week in the last few years, we would release about 23. The economics profession’s pivot to studying many aspects of the pandemic is just remarkable.
“The other visible change in NBER activity is with regard to conferences. Our last in-person meeting was on Friday March 6. Spring is a busy time for research meetings, and we had 39 conferences of various types scheduled between March 6 and June 30. Twenty-five have been postponed or cancelled, but 14 have gone virtual. We’ve held 8 on-line meetings so far, with six more scheduled in the next five weeks. The NBER conference team has learned a lot about managing a virtual event, and meeting organizers, presenters, and participants have all shown great flexibility and resilience when an unexpected software glitch or a breakdown in internet connectivity results in an unscheduled conference interruption. This year’s Summer Institute will be virtual. The meetings will typically be shorter than their in-person counterparts, and scheduled to try to accommodate participants from many time zones. We are also hoping to live-stream many of the meetings to make them broadly accessible.
My assessment – and others might disagree – is that on-line presentations have worked quite well for summarizing the findings of completed papers. The comments from assigned discussants also work well. The greatest differences between the in-person and the on-line experience seem to be in the dynamic of question-and-answer and (not surprisingly) in the opportunity for informal interaction away from the presentation. I have seen some Q&A periods work well, most often when the organizer takes the initiative to encourage some participants to ask questions or when one member of a co-author team is presenting the paper, while another member is active in chat channel answering or clarifying questions as they arise. Collectively, economics – and, I am sure, all other disciplines – are working to find good ways to foster interaction in the virtual setting.
This is likely to be particularly important for early-career scholars, who do not have established networks and who have traditionally depended on conversations at professional meetings, often at lunch or dinner or over coffee outside the formal presentations, to meet other researchers and to begin collaborations. Although virtual meetings struggle with regard to networking, they excel with regard to convenience. Some on-line NBER meetings in the last two months have attracted audiences that are more than twice as large as their usual in-person analogues. NBER is hardly alone, and is not in the vanguard, in discovering this. There are a number of weekly, virtual, seminar series that have been organized by various economic researchers; some have attracted many hundreds of participants. It’s still a bit early to judge the impact of virtual meetings on the long-term evolution of intellectual exchange within economics, but my best guess is that there will be substantially greater demand for virtual meetings in the future.
Finally, a less visible but no less consequential development over the last ten weeks, has been the sharp acceleration of grant application activity by economists. Fuing agencies like the NSF and the NIH as well as large private foundations have announced rapid-turnaround grant programs to support researchers who are studying various aspects of the COVID-19 pandemic. The research community has responded to these funding opportunities with great enthusiasm. The NBER serves as the administrative home for a wide range of research grants, and our grant administration team has seen a sharp uptick in the number of proposals that researchers are submitting to various funding organizations. As the research community begins to get access to new data sets, to surveys, and to other information on both the health and the economic developments of the last few months, I expect that we will learn an extraordinary amount about the nature and impact of the pandemic and the counter-measures that were deployed to fight it.”