The danger to democratic norms aside, this chapter demonstrates that state government is also a needless source of additional regulation, additional taxation, and inefficient duplication of functions – in short, a waste of taxpayer money and a pointless burden on the citizenry. Yet, many of the specific functions currently performed by state governments are essential. The abolition of state government would therefore require the redistribution of those necessary functions between the national government and the local governments. This chapter demonstrates that such a redistribution would be administratively workable. To show this, it formulates general criteria for deciding which functions should go where and offers illustrations of how those criteria might be applied to specific functions in practice.

Because of the economic power of incumbent firms and the political power of multiple veto players, changes to the developmental state were usually incremental.This contributed to the protagonism of the civil service as a change agent. Drawing on three case studies, the chapter illustrates how epistemic communities within the bureaucracy guided a variety of innovations across unconnected policy arenas: fiscal, health, and anti-corruption. Although policy innovation by the bureaucracy was incremental, slow, and often restricted to particular “islands of excellence” within the archipelago of state agencies, it was nonetheless essential to the most important accomplishments of the past generation. Civil service incrementalism, however, may have made change away from the overarching systemic equilibrium of the developmental state less likely, by exacerbating the fiscal quandary, sustaining the coalitional presidential system, and suppressing demands for more radical reform.

Chapter 3 considers the analytics of helicopter money drops – monetized fiscal stimuli. These will always boost nominal aggregate demand because central banking is profitable (interest rates on assets exceed those on liabilities and/or central bank money is irredeemable). This Chapter also summarizes some of the key results of the first three chapters in the following propositions.

1: A central bank can be solvent with negative conventional equity.

2: Central bank current and future resources are ‘tax payers’ money,’ because the Treasury is the beneficial owner of the central bank.

3: The cancellation of Treasury debt purchased by the central bank is equivalent to the central bank holding that additional Treasury debt forever.

4: QE that is permanent/irreversible in present discounted value terms creates fiscal space for a deferred helicopter money drop.

5: A helicopter money drop today boosts demand even in a permanent liquidity trap, when the nominal interest rate is at the zero lower bound (ZLB) forever.

6: Lack of nominal effective demand is a policy choice or the result of a failure of cooperation and coordination between the central bank and the Treasury, not an unavoidable fate, even for an economy apparently stuck at the ZLB.

The original inspiration for this volume was the Frederico Caffè Lectures I gave in Rome on December 13–14, 2011. Quite a lot of water has flown down the Tiber since then and my thinking about the monetary and fiscal policy issues I addressed in the lectures has evolved and, I hope, become more coherent.

The simple idea that motivates most of this book is that central banks make a significant, indeed at times essential, contribution to the fiscal space of the sovereign. This is because the ability to issue monetary liabilities, especially currency, is a source of profits to the central bank.