Quantitative easing: giving cash to the public would have been more effective

The Guardian article "Quantitative easing: giving cash to the public would have been more effective" (10/29/2014) offers rhetorical flourishes rather than understanding when discussing Quantitative Easing.

Central banks have always been wary of “helicopter money” on the grounds that QE is temporary while giving cash to the public is permanent. But the temporary has become permanent. What was once unconventional has now become conventional.

As with most casual commentary about monetary policy, which trades understanding for catchphrases, sophistry, and silliness, this is phenomenally foolish.

QE is temporary in the sense that the Federal Reserve traded one asset for another asset (cash for Mortgage-Backed Securities and U.S. Treasuries).  The Federal Reserve "created money" and purchased these interest-bearing assets.  As these interest-bearing assets bear fruit, they can un-create the money they created (plus some more thanks to interest, if they so desired).  It is in this sense that QE is temporary.

Simply giving money away isn't trading money for an interest-bearing asset: it's giving money away.  Not only would it be illegal for the Federal Reserve to do this (this is fiscal policy, not monetary policy, the purview of Congress), but it would be permanent because the Federal Reserve has no way to "un-do" it, absent taxes which go unspent.

The distinction between "permanent" and "temporary" is not in the timeframe, it's the net change in assets.  The writer of the Guardian's article either misunderstands this meaning of temporary and permanent or ignores it: without this distinction, the article loses coherence.

The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth -II

Below, Corrections depicts two uses of the Index of Economic Freedom.  In this version, we have added some countries that were previously missing due to heterogeneous naming of country names, and use yearly data, and we depict the data points associated with the U.S. separately from other countries. We combine the IEF with the Penn World Tables, the last of which is available in 2010, giving yearly data for most countries from 1995-2010.  The first figure (click to enlarge) looks at the GDP growth rate (rather than the level growth rate) by the change in economic freedom.  For those curious, the largest GDP/capita growth rate is that of Afghanistan between 2001 and 2002, for obvious reasons.  Iraq between 2003 and 2004 has a similar jump.

The second figure first regresses growth on size, and plots residual growth against the change in IEF (click to enlarge).

Does the Federal Reserve Cause Growth? Apparently!

Hating on the Federal Reserve is a religion.  Among the falsities that will be claimed is that the United States grew faster when the Federal Reserve did not exist than when it has.

This is an unusual claim, as U.S. NIPA accounts only started in 1934 (retroactive to 1929), and the Federal Reserve came into being in late 1913/early 1914.  Indeed, the only widely used statistics Corrections is familiar with, Christine Romer's data extending back to the 1870's, still make a comparison difficult (and, we conjecture, will bear out the Federal Reserve).

In any case, we can use the late Angus Maddison's historical data to look at the geometric average of GDP/capita growth in constant Geary-Khamis dollars from 1800-1914, and from 1914 to 2010, the last (and first) year the data is contiguously available.

As one might rationally expect, the results don't bear out the Fed haters:  from 1800-1914, the geometric average growth rate is 1.15% per capita in real terms.  From 1914 to 2010, the geometric average growth rate is 1.95% per capita in real terms (the common "2%" number often claimed).

Note that Corrections is willing to bet that actual GDP growth (rather than GDP per capita growth) was faster in the 1800's than in the 1900's, ironically due to the massive waves of immigration, an actual cause of growth that conservatives want to kill off due to largely unstated, unsubstantiated, or untestable claims.

This shouldn't convince anyone, nor does Corrections expect it will.  It's a terrible comparison to make, with little to no information contained in the statistics.  That said, this allows for a double indictment of the argument.

The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth

The Index of Economic Freedom is correlated with GDP/capita.  Whatever our qualms about the Index's creation (it is fatally flawed), the manner in which it is almost always cited is wrong.  Not only is the instrument useless, but the traditional conclusions made with it are logically fallacious.

Corrections notes that in order for the Index of Economic Freedom to be useful in discussing growth, changes in the index should correlate with changes in GDP per capita growth.  Below, we take the difference in the rankings for the IEF and plot them against the difference in GDP per capita in Geary-Khamis dollars (PPP) (click to enlarge).  96 countries have data in both the Penn World Tables and IEF in 1995 and 2010.

The fit is so poor that a traditional OLS regression finds IEF on real per capita GDP change is worse than chance (it explains less of the variance than the average totally random sample would).  

Stock Ownership over Time

Below, Corrections displays a set of years with the proportion of the U.S. population holding stocks in their portfolio of assets:

• 1952:  4%
• 1970:  15%
• 1990:  32%
• 2000:  62%
• 2011:  54%

The United States has seen a dramatic rise in the proportion of the population holding stocks.  The impact on equilibrium taxation of capital will be an interesting long-run story.

Employment/Working Age Pop

Below, Corrections depicts total employment/population aged 16-64 (click to enlarge).

We have unambiguously seen an improvement since the trough in 2009/2010.  

myRAs

The biggest grip Corrections has with modern Conservatives and Libertarians is that they have abandoned intellectualism and new ideas in favor of bizarre non-sequitur ad hominems.  Replaced thoughtful economic policy with a love of a metallic numismatics.  Replaced an understanding of economic facts with stories that don't hold water, statistics that don't exist, and conspiracy theories.  Replaced critical self-inspection with pure hypocritical party politics.  Replaced Morning in America with apocalyptic cultism.  All this alienates Corrections from the movement, which we believe could be successful, if only it would think and be the party of ideas again.

An interesting litmus test for the party: myRA accounts.  While the concept isn't fully fleshed out, the idea is a government-backed Roth IRA type account, possibly with a new type of bond.  Here, we sample two possible responses:

1. This is the government trying to take over retirement savings!   Soon they'll nationalize the whole kit & kaboodle!
2. In the long run, this could be a means through which we can innocuously privatize Social Security.  Insofar as your payments into social security correspond to future payments out of Social Security, it wouldn't be absurd to simply force "purchases" of these savings bonds rather than having SSA keep the money.  This can over time be liberalized.

Of course, the first is hyperbolic and the second would need to be fleshed out (for instance, while payments in have corresponded positively with payments out, there are no guarantees.  Privatization would be a guarantee, which would impact the ease with which we can make Social Security solvent by defaulting on those implicit promises in the future).  But we believe how the party views the future (constructively and creatively, as it did in the past, or destructively and foolishly, as it has for some time now) will determine it's success.

 Corrections hopes that the constructive, second party wins out.

Average Household Retirement Wealth: 2008

Below, Corrections displays a (corrected) table from Poterba, Venti and Wise (JEP 2013) displaying average household wealth at retirement age (65-69) in 2008 (click to enlarge).

Poterba, Venti and Wise calculate the expected net present value of many (often annuitized) promises that households held (such as Social Security and defined benefit pensions) that depend on the lifespan of the household.  Note that these are not liquid holdings!

Of course, while the average household had $871 thousand dollars in net present value , the median had $548 thousand ($187 in social security, $0 in defined benefit pensions, $227 in non-annuitized wealth, $15 in financial assets, $5 in personal retirement accounts, and $120 in housing).