The Keynesians must be really desperate. In an article titled "A helicopter drop for the Treasury," MIT economics professor Ricardo Caballero wants the US government to cut taxes for everyone. So far so good, but there is a catch: the Federal Reserve will have to print enough money to make up the expected loss to government revenues. The key for Mr. Caballero is to cut taxes while not increasing the public debt (since when did Keynesian's care about the national debt?). According to this classically trained economist, printing money is the solution to all of America's problems. It will magically put the US on a road to recovery and prevent the US from falling into the liquidity trap. It really takes a Keynesian economist to come up with this incredibly insane idea. Unfortunately, this is the best idea the Keynesians have and what's scary is that the Fed might like this plan. Here is the article:
Quantitative easing, when directed to Treasuries, adds a little bit of good to the mix by lowering the cost of funding public debt, and it also helps a little bit with the long-run cost of capital for the private sector. But these are second-order effects; the Treasury still increases public debt at a fast pace, and a slightly lower cost of capital doesn’t much help the private sector if aggregate demand is not there to buy the goods in the first place.
Instead, what we need is a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a “helicopter drop” targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury.
