Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 22 May 2015

We want helicopters, and we want them …

Not now exactly. In the UK, for example, the MPC has scope for some further reduction in interest rates. (I think they should use that scope now, but that is for another day.) But, as Mark Blyth, Eric Lonergan and I argue in the Guardian, if something serious goes wrong in the next year or two, or if another financial crisis happens in the next decade or two, monetary policy is under equipped.

Does this mean that I no longer think it is a good idea to have a fiscal stimulus in a recession when nominal interest rates are at their floor? Of course not, because helicopter money is essentially just like a tax cut. What is true is that helicopter money is not my ideal form of fiscal stimulus, partly because there is some uncertainty about how much of it will be spent. I would much prefer additional public investment, for which there is a strong microeconomic as well as macroeconomic case. [1] Michael Spence [2] is one of a huge list of eminent economists, which includes Ken Rogoff, who think additional public investment across the OECD would be beneficial.

We should continue to urge governments to recognise this, but we also have to accept the awkward fact that they are not listening. In political terms, the need to reduce deficits trumps pretty well anything else. (Perhaps things are turning in the US, but until the Republicans start losing power I’m not counting chickens.) One of the many depressing things about the Conservative election victory in the UK is that it looks like deficit obsession is an economic strategy that can win, as long as the austerity is front loaded, which is why Osborne fully intends to do it all over again. 

Because helicopter money is mainly a form of fiscal stimulus, and because the case for fiscal stimulus in a liquidity trap is largely agreed by most academic macroeconomists, the debate over helicopter money is essentially an issue in political economy. Persistent demand deficiency is clearly preventable, and represents a huge economic cost to society. Politicians will not do what economists call a bond financed fiscal stimulus because spreading scare stories about public debt is a vote winner. That leaves us with a money financed fiscal stimulus, of which helicopter money is one form. With independent central banks, that means giving these banks the power to undertake helicopter money.

I think the biggest obstacle to helicopter money is probably central banks themselves. This is for two reasons. First, they seem far too optimistic about the efficacy of creating money to buy financial assets (QE), even though they almost certainly need to create far more money by this route than they would through helicopter money, with a far less certain impact. Second, there is this residual worry that creating money now will mean they will lose the ability to control inflation in the future, as if a modern government in an advanced democracy would ever refuse to provide them with the assets they need.

The consensus among macroeconomists is that independent central banks are a good idea. The belief is that the business of macroeconomic stabilisation is best achieved if the task is delegated. But making central banks independent is not the same as completely delegating the task of macroeconomic stabilisation, because of the problem of the lower bound for nominal interest rates. Indeed independent central banks made the obvious way of getting around the lower bound problem, which is a money financed fiscal expansion, more difficult to achieve. Helicopter money is a way of making the delegation of stabilisation policy complete. 

[1] I have suggested how (see here and here and here) we could have ‘democratic helicopter money’ that could encompass additional public investment, but I’ll happily settle for the plain vanilla kind for the moment.

[2]  HT Diane Coyle

39 comments:

  1. "The consensus among macroeconomists is that independent central banks are a good idea."

    Well, they would say that wouldn't they.

    Philosopher Kings prefer Philosopher Kings to be in charge, and not dumb elected politicians. I'm shocked.

    See every other profession you can name.

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    1. Right, so now anything anybody says, regardless of any expertise they may or may not have, is necessarily self-serving therefore must always be ignored.

      This sort of a priori argument is always to be preferred than even considering looking at data to see if macroeconomic performance is any better with central bank independence.

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    2. Macroeconomic performance is not the only benchmark by which we should measure how a country is governed.

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    3. In general I agree, but in the case of central bank independence I don't see what the other benchmarks are.

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    4. Surely it is the benchmark by which we should measure the effectiveness of monetary policy?

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    5. But if "dumb elected politicians" do have complete control of stimulus, then by definition they have access to the printing press. And that is widely regarded as undesirable.

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    6. But the alternative if "dumb non-elected bankers" have complete control of stimulus, then by definition they have access to the printing press. And this is regarded as desirable. Which suggests after the recent Financial Crash the overwhelming majority of the electorate has a hole in its head where its brain should be!

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    7. Money is an abstract “representation” of real resources. It enables us to move resources about an economy to satisfy our needs for goods and services. It’s always created as a promise that in return for accepting “representation” it will always be take back for repayment at par if the government creates it and at par plus interest if a private bank creates it or shadow bank re-lends it. Inflation occurs if any of these agencies inject too many “representation promises” into an economy relative to capacity meaning real resources availability. To counteract this possibility some agency has to take responsibility which not only has a clear understanding of the sources of “representation promises’ but has to be independent to control these sources yet democratically accountable to the electorate. At present this isn’t happening.

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  2. SH: I think it's time you came up with another contrarian idea that you could repeat ad nauseam on this blog.

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  3. SW-L seems to think public investment is a good way of dealing with recessions. He says “I would much prefer additional public investment…” I flatly disagree.

    It may well be that more of such investment is needed, in which case raise it, regardless of whether there’s a recession or not. It often takes YEARS to get public investment projects going and years to complete them, why which time the current recession may easily be over. Thus INVESTMENT is very definitely NOT A SUITABLE WAY of combating recessions. I.e. anti-recessionary spending should be BROAD BASED.

    Another weakness in helicopter drops is precisely the latter mentioned one, namely that heli drops are not a broad a based form of stimulus: that is, they boost households pending, but not PUBLIC non-investment spending to any great extent. I.e. assuming stimulus is to be politically neutral, the public as well as private sector should be boosted, strikes me.


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    1. I think this argument is overrated. The Coalition government managed to cut public investment very rapidly. That is because most of it is not 'big ticket' items like HS2, but more boring stuff like flood defences or school repairs or filling holes in roads. It does not take time to plan to do more of this kind of thing.

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    2. Depends on your investment.

      You can in fact rattle off a list of things. Imagine getting good quality optical fiber to every home (or 99%) - a simple project to start and run, and once the fiber is in place there are generations of equipment upgrades on both sides of it to come.

      Big road and bridge projects may take years, but again on a smaller scale there are plenty that can start pretty soon.

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  4. Simon,

    As you rightly say, a helicopter drop is “just like a tax cut”. In which case, what’s the point of heli drops? After all, they require an entirely new system to be set up: the central bank having a list of everyone living in the country and a system for disbursing money.

    Then there would be inevitable problems with those who didn’t have bank accounts, and people who have recently moved: including moving in and out of the country.

    During the crisis, VAT was altered twice. That seems much simpler to me.

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    1. I thought the point was obvious from the post - politicians obsess about deficits, so push fiscal lever in wrong direction.

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    2. The point is, surely, that tax cuts only go to those paying tax - and the wealthier will choose to save the money rather than spend it. Those.who pay little or no tax are far more likely to spend it. But I'd also prefer public investment - because it's spent on investment, on public goods. Heli drops are more likely to be spent on consumption, which will drag in more imported goods, benefiting only other countries.

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    3. Simon,

      Your solution to the problem that politicians “push the fiscal lever in the wrong direction” is to have another and better qualified lot of people also doing fiscal stimulus. Strikes me that having two lots of people determining fiscal stimulus (or anything else) is a bit like a car with two steering wheels.

      And even if politicians did have decent economics qualifications, I still don’t favor a system (i.e. the existing system) where two lots of people try to influence stimulus, one via monetary means and another lot via fiscal means. That again is like a car with two steering wheels.

      The best system is one where decisions are taken by those best qualified to take those decisions. In the case of the OVERALL size of any bout of stimulus, that’s best decided by qualified economists (flawed as they are). As to strictly POLITICAL decisions, like what proportion of GDP goes to public spending, that should be left with politicians.

      A system that achieves that optimum split of responsibilities was set out by Richard Werner and co-authors in their submission to Vickers. It consists of a committee of economists telling politicians how much new money or “helicopter money” they can have over the next year or whatever. Politicians can then use that money to boost public spending or cut taxes as they please. As to interest rates, they’re left to find their own level, though I wouldn’t rule out the above committee adjusting interest rates in an emergency.


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  5. I presume the analysis of of the 2015 election and the percentage of pensioners who read anti-deficit newspapers who voted for the Tory Party for that reason has not been done yet.

    Compared to the percentage who voted Tory in the Thatcher and Major years, the 36.9% achieved by the full Sun-Mail dual propaganda machine suggests their ability to shift the nation is slipping, particularly as it relied on Lib Dumb deficit idiocy, BBC incompetence, and Labour confusion.

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  6. If the government increases the money supply, it says it is a good thing for the benefit of the nation.
    If I did the same thing from my garage I would be arrested as a menace to society.

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    1. Stuart P,

      No contradiction there. ALL MONEY PRINTERS profit from printing money. That profit is called “seigniorage”. But money supply increases ARE NEEDED from time to time, which raises the question: who should do it? My answer, and the answer of many others, is: “the state”. That way, we all benefit, not just people in garages.

      Moreover, under the existing bank system, PRIVATE banks can effectively print or “issue” money, and reap seigniorage profits. That’s one of the arguments for a “state money only” system: i.e. full reserve banking.

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  7. Market Fiscalist22 May 2015 at 06:28

    How would the reverse of helicopter money work when the period of demand deficiency is over and the extra money leads to an increasing price level ?

    Would central banks also have the power to introduce "vacuum cleaner" taxes ?

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    1. Couldn't they just raise interest rates which are at the zero lower bound?

      If need be they could go the Volcker route and jack rates to high levels, although I bet he could have brought inflation down more gradually without so much collateral damage.

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    2. "the extra money leads to an increasing price level ?"
      How would this happen?

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  8. I agree with this post and the Guardian column. I would also switch from inflation targeting to NGDP path level targetting. This would allow for "catch up" growth. If employed during this last recovery it would be a blinking red signal about how much the US and UK governments have failed.

    The overemphasis on and fear of inflation - like government debt and deficits - hurts recoveries.

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    1. Instead of focusing on inflation or debt levels, the priority should be on closing the output gap and fulfilling the economy's potential. After the gap is closed, then bring down inflation and debt levels.

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  9. Simon, in case you need a hand convincing the likes of Ferguson that Osborne eased off on austerity in the end of the last Parliament, check out the governments own transparency site, where they list "Support Whitehall departments in delivering £20 billion of savings per year by 2014/15" under the heading "Overdue in completing". It's here in black and white:

    http://transparency.number10.gov.uk/business-plan/1

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  10. Or just use fiscal policy.

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  11. SWL means well but...

    If a fiscal stimulus is politically unacceptable then helicopter money is unacceptable x 2.

    Helicopter money does not fit into the household finance model of the economy of a sovereign nation that currently constrain the politicians. The only reason QE was an acceptable option was because nobody understood what it was or how it was supposed to work including those who ordered it up.

    Thats it fartig.

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  12. "This is for two reasons"

    I think you're wrong about that.

    Central banks want financial assets in exchange for the money they create.

    Apart from operating expenses, they don't want the responsibility of distributing money without getting financial assets in return.

    And that's probably prudent.

    It would be an incredibly slippery and unruly slope otherwise.

    It would require full operational integration of treasury and the central bank to get it done properly.

    http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/

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    1. JKH,

      So what’s wrong with “full operational integration of treasury and the central bank”? The stock answer to that is that politicians then get too near the printing press. However that’s not true if the TOTAL SIZE of stimulus is determined by a committee of independent economists (e.g. the BoE MPC), while politicians remain free to take strictly POLITICAL decisions like what proportion of GDP goes to public spending, and how that is split between education, health, etc.

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    2. Ralph,

      Part of the rationale behind this proposal seems to be that politicians and the public are generally paranoid about deficits and deficit financing (with bonds).

      In getting approval for such a proposal, somebody’s going to have to explain to somebody else why HDs are more palatable. And they’re going to have to explain how permanent deficit financing with excess banks reserves (which may require an interest cost (fiscal) in the future) is fundamentally any different than bond financing – which they won’t be able to do. They can only hope to lie about it.

      If monetary policy wants fiscal financing using HDs in its quiver, it would be better to combine central bank and treasury operations and start over - on an intellectually honest basis – instead of attempting a runaround of the core issue of options for deficit financing.

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    3. JKH,

      When UK and US obsess about the deficit / debt, they generally fail to mention the level of reserves. SW-L is arguing that the deficit obsessors are irrational. Because they are irrational, they will probably miss that the increase is reserves is equivalent to bond financing. Just look at how the US debt ceiling (now binding!) is defined.

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    4. Squeeky,

      I get that perception.

      But its poor form to combat perceived irrationally with an intellectually dishonest ruse. And central bankers are generally not at the top of the intellectual dishonesty scale.

      Helicopter drops pose the same deficit interest expense risk as QE and short term treasury bills. Central bankers don’t really want permanent QE, and they have enough to do managing that box without getting involved in some gimmicky notion of incremental helicopter drop deficit financing.

      If you want to change that, you have to change the institutional framework at its core IMO.

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  13. I suppose the Tory mantra ad nauseum is to blame labour for economic crisis, and anything other than the "sound household financial sense" of St Hilda would alienate their core voters.

    Whilst I appreciate the economic conditions of 1976 were completely different, was it the time when the fable of Labour's economic incompetence was founded?
    An article from 2005 may be worth a re-read for a number of reasons, not just the "cap in hand" IMF loan (of a whopping £2.3bn).
    http://www.ft.com/cms/s/0/93cb0260-68f4-11da-bd30-0000779e2340.html#axzz3auEXQZ6c


    On a more serious note, is the possibility of a sterling crisis the reason politicians seem fixated with deficits in the UK/EU ?
    How credible is sterling compared with the Euro, or indeed the dollar?

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  14. I'm not quite sure what form Helicopter money should take, but would it be possible to describe the recent Pensioner Bonds as anti-Helicopter Money?

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  15. Pensioner Bonds were a staightforward election bribe. I pay you. You vote for me.

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  16. Why not 'QE' for infrastructure (the quick kind) rather than for helicopter money?

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  17. Not a bad idea to prepare better for the next crisis, but helicopter money might not be sufficient if the Wicksellian natural real rate is more negative than the inflation target is positive. Helicopter money will not be used when inflation is already on target. Unemployment could still be persistently high.

    Why not start by setting higher or better targets? My guess is that this alone would give enough confidence to the economy to make helicopter money unnecessary in the vast majority of circumstances.

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  18. Also regarding the political problems of providing fiscal stimulus, wouldn't a higher or better inflation target put governments in a better position to spend knowing their revenues were going to grow at least nominally? Wouldn't debt to GDP be more easily kept under control in a stably rising NGDP environment which would provide the confidence that spending isn't going to cause the ratio to go out of line if GDP suddenly drops?

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