I'm still working on getting a firm grip of this concept, which in no way is as clear as it might sound to someone who hasn't really tried to study it (this, of course, applies to everything in science, or life in general). "Money printing" was in no way a clear concept even in Weimar Germany, and the real-time experience seems to have been in stark contrast to the simplified image of "pure monetary madness" created by writers afterwards.* To get an idea of the problems around the OMF concept, I suggest you read William White's take on it at Project Syndicate (don't miss Adair Turner's reply to Mr White which he has posted as a comment on that article).
Being aware of the danger of over-simplification, I nevertheless present, in simple terms, my take on OMF below. My aim is to provide a glimpse of the substance ("the wood") as I see it, without letting the form ("the trees") get into the way. There are many technical ways to achieve more or less the same outcome. My biased opinion is that behind the apparent simplicity of my description lies a fairly nuanced understanding of the subject, thanks to Messieurs Turner and White, and various other writers dead and living.
"Just Like Money But Not Money"
a play by P. Golovatscheff
When Mrs Government decides to spend -- often to acquire goods or services to be used for the 'common good' of the nation -- she hands over IOUs (usually, but not necessarily, what we call "money") to the one who sells goods or services to her. This someone is often a government employee or, more generally, a government supplier. We can imagine how Mrs Government says to the supplier who has just provided her with goods or services:
"Mr Supplier, please take these IOUs and trust that they will be redeemed by taxpayers, sooner or later."
In other words, Mr Supplier should expect to be able to buy goods or services from other taxpayers using these IOUs, because a tax obligation makes it necessary for taxpayers to acquire -- really, redeem -- these IOUs. If others share his expectation, then the IOUs become generally accepted. As we see, the IOUs are not Mrs Government's own IOUs; she issues them on behalf of the taxpayers. This is comparable to a husband shopping with a credit card connected to his wife's account, when the wife is the sole income-earner in the family. It is she who will redeem (for instance, by selling labor) the IOUs her husband issues -- with the common good of the family in his mind, no doubt -- on her behalf.
This is the underlying logic I see behind government spending and taxation. This is, also, my reading of Alfred Mitchell-Innes and the kind of chartalism he seemed to endorse (here, and one year later here). In his words: "Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money". I might be wrong, but I feel that Innes has not been fully understood even by people who often cite him (I'm thinking about some MMT writers, among others).
Act 2: Impeccably honest Mrs Government fails to fool Mr Supplier-Taxpayer
What the advocates of "helicopter money" are effectively suggesting is that Mrs Government should spend like she is used to spend, and actually spend a bit more, but this time she should sent a letter to Mr Supplier, saying:
Dear Mr Supplier / My Beloved Taxpayer:
Take these IOUs but understand that they are not really IOUs at all. My firm intention is not to bother taxpayers, You included, by placing any burden whatsoever related to this spending on Your shoulders. Not even by issuing bonds later to cover the deficit I am incurring through this spending, because the bonds would burden You with unnecessary interest charges.
Having said this, I can assure You that personally You have nothing to worry about. These IOUs are fungible. By this I don't mean that they will be consumed by some eukaryotic organism, but that no one can tell them from the IOUs that are matched with a real tax burden. (On a more personal note: I cannot express in words how sorry I am for this real burden I impose on You, but that is unfortunately the only way my spending can be financed in any meaningful sense of the word -- rest assured that I will never forget Your sacrifice.) The fungibility of these IOUs will ensure that you are able to give them up in exchange for goods or services as before, just like they were real IOUs.
But please consider this friendly advice: If You take history as your guide, You might want to get rid of these IOUs rather quickly. This is because my honesty -- I scarcely need to remind You that I am a lady of high ethical standards, and, additionally, transparency seems to be in fashion -- around this matter should, if not in practice then at least in theory, cause any rational human being to expect higher inflation sooner or later. And any economist can tell you that if a sufficient amount of people expect higher inflation later, the inflation will actually arrive much sooner than expected.
Always at Your service, Truly Yours,
---------------------------- THE PLAY ENDS -------------------------------
I want to end this post my making two broad statements.
First, we cannot say that OMF can be used to "finance" certain productive investments by the government. Any attempt at "ear-marking" would be just an exercise in illusion. OMF will be an inseparable part of the overall government budget, and will thus "finance" in equal proportion all the consumption and investment that may arise from government spending -- also the wasteful activities. We are all imperfect, and the government doesn't make an exception here. Further, we should expect that any easily identifiable productive investments are already made by the government. In any case, our ability to undertake them should have nothing directly to do with OMF.
Secondly, and more importantly, it makes very little sense to say that OMF can finance anything at all. The whole point with OMF is that part of government spending will never be financed in any meaningful sense of the word. That a person of a very high intellectual capability can claim that OMF (yes, the F stands for 'Finance') can be used to finance government spending shows mainly how horrible is the state of our economic vocabulary. "Overt Monetary Fooling/Faking/Failure" would, to me, sound more descriptive. Unfortunately, sloppy language often corresponds with sloppy thinking, and even Mr Turner doesn't seem to be able to fully escape this trap.
I fully agree with Mr Turner. I would say that this kind of debate is not only welcome, but that it can lead to improved understanding of the problems caused by the global debt overhang.
It is my intention to engage in this debate with this piece.
* In order to understand how things appeared to various spectators, and actors, "in real time" during the Weimar experiment, one could do much worse than by reading historian Adam Fergusson's study, "When Money Dies" (1975), on the Weimar hyperinflation.