Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 6 August 2015

The Bank, helicopter money and fiscal conservatism

I want to connect two apparently quite different blogs. The first is by Fergus Cumming from the Bank of England on helicopter money, and the second is by Labour MP Jon Cruddas on why Labour lost the election.

Eric Lonergan gives a detailed response to Fergus Cumming’s post. I will only make two basic points. Here is one critical sentence right at the beginning (my italics):
“This post discusses why such a policy is different to quantitative easing, why it is unlikely to have much impact relative to conventional fiscal measures and the pitfalls associated with pursuing it.”

Read it carefully – it says helicopter money will be shown to be different from QE, but will then be compared not to QE, but conventional fiscal measures. If this seems strange to you (the Bank implements QE and in most serious proposals would implement helicopter money, while governments do fiscal policy) you are correct, as I will argue.

Later, in talking about what might happen if (and it is an if) - after implementing helicopter money - the bank ran out of assets to sell, he writes:
“In some senses the central bank is now ‘insolvent’. [This is later described as 'policy insolvency'] Ordinarily, a government could recapitalise the central bank by gifting it government securities. But this requires issuing new debt, all else equal, which reduces the initial stimulus to a vanilla, bond-financed fiscal transfer.”

So helicopter money that is financed later by recapitalising the central bank is just like a normal fiscal stimulus, and is therefore presumably unproblematic from the central bank’s point of view. Perhaps for that reason it is not discussed further in the post, but that makes subsequent statements about the hazards of helicopter money almost beside the point. After all, the Bank has already addressed the issue of this ‘policy insolvency’ as a result of potential losses from QE, and its response was to get the government to commit to recapitalise. So the same solution for helicopter money is the obvious way to go. In other words, what’s the problem? It only makes sense to ignore this possibility because helicopter money is being compared to fiscal policy rather than QE, something that as we shall see makes little sense.

The key conclusion to the blog is
“For helicopter money to work, households and firms have to believe that all future central bankers and governments want to abandon inflation targeting.”

This does not follow from what has gone before. As we have already seen, helicopter money that is accompanied by subsequent recapitalisation if necessary avoids any inflation problems. In addition, this statement implicitly assumes that the central bank is always able to hit its inflation target. That is a bit like assuming your conclusion. If a combination of inflation and the output gap are below the level the central bank wants to achieve, then the right amount of helicopter money will not lead to ‘policy insolvency’, but instead the central bank being able to hit its targets.

Jon Cruddas presents opinion poll evidence about why Labour lost the 2015 election. The headline is “Labour lost because voters believed it was anti-austerity”. His evidence seems to be very simple. When voters are asked whether the agree or not with
“We must live within our means so cutting the deficit is the top priority”

most agree. The only positive thing you can say about a question like that it was well chosen to get the required result. It is a bit like asking whether people agree with the statement “the welfare system is out of control so the government needs to take action to reduce benefits”. How the response to this question justifies a headline that people believed Labour was anti-austerity is not clear. However I agree with Cruddas’ final conclusion, which is that
“We can seek to change the views of the public, but it’s best not to ignore them.”

Labour’s policy some time before the 2015 election seemed to be about trying to ignore the issue.

What is the connection between the two blogs? The implication that Cruddas draws is that voters are fiscally conservative. Indeed if you take the poll response at face value, voters would prefer balanced budgets even during recessions. If politicians follow/exploit that conservatism, it means that appropriate countercyclical fiscal policy will not occur during a severe recession, and an unhelpful procyclical policy is more likely. Given that, dismissing one version of helicopter money because it is just like these appropriate fiscal measures is bizarre.

Helicopter money has become popular because of the absence of the appropriate fiscal policy response and the inadequacies of QE. As long as most mainstream politicians continue to argue against sensible fiscal policy in a liquidity trap recession, critics of helicopter money should stop assuming that this sensible fiscal policy will happen. It is strangely hypocritical for those in a central bank which is implementing QE in part because of inappropriate fiscal actions to compare helicopter money not to QE but the very fiscal measures that are not happening, and then to ignore the case where helicopter money successfully substitutes for those measures. It is saying I'm doing the second best policy B because policy A is not happening, but I'm not going to do policy C because it can be just like policy A! I'm beginning to think the critics of helicopter money have no clothes.


  1. One of the nine MPC members voted today for a rate rise, presumably being the person leaking the information to the press over the weekend that I heard on the radio news saying that the MPC might vote for an interest rate rise sooner rather than later.

    I wonder if our BoE will go 1937 Fed, and whether that may change something, or even today's Fed might go 1937 and raise interest rates in a matter months?

    1. 1937 Fed or more recently the ECB and Swedish Riksbank. The US economy probably will be able to handle a September rate hike but if they go too quickly after that, they'll probably have to reverse themselves.

  2. It is more than a little depressing that a hingh rnaking politician is unable to identify a rigged poll question that obvious. He should rewatch one of UKs best ever TV shows Yes, Minister and lkearn a thing or to from Sir Humphrey on opinion polls. Unless of course he prefers to play the role of Bernard.

    Or maybe he himself really wants austerity.

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  4. Kind of weird the whole "ask the public what economic theory they'd like us to adhere to" part anyway. The Tories have been so effective in their propaganda about what agenda should be followed it's kind of meaningless. Even it it wasn't a loaded question the only thing that you've really shown is "The Tories have been very very effective in getting everyone to think how they want"

  5. I don't see what's wrong with policy insolvency. The Bank of England won't close if it can't redeem its notes -- its liabilities are fiat money. If it lacks assets needed to reduce its liabilities, then it is irreversibly committed to a high supply of high powered money.

    It is generally argued that the problem with QE is that the central bank can't precommit to keeping policy loose when unemployment has returned to normal and it won't want to deliver the (implicitly promised inflation. Policy insolvency is the solution to the problem that preoccupies Woodford, Krugmana and you. On the other hand, it would lead to inflation. The case that it is a bug not a feature is the case that, liquidity trap or no, higher expected and achieved future inflation is intollerable. I think there is a contradiction between fearing policy insolvency and supporting QE as a signal of higher inflation target (so Woodford & Krugman at least should eagerly seek policy insolvency).

    On a more practical note, I agree that critics of helicopter money have no clothes. On the other hand, I don't know UK law. US law forbids helicopter money. Congress could change the law to allow it, but, of course, Congress could also enact stimulatory fiscal policy. The problem with fiscal policy is political -- the people with power insist it would be counter profuctive in spite of overwhelming evidence. At least for the USA the there is the exact same problem with helicopter money -- the exact same group of people have the power and oppose it.

  6. You have to start from the abject failure of fiscal policy in numerous countries. In the US this partially caused right wing lunatics to take control of Congress . If you don't think they're crazy watch tonight's Repuclican debate.

    So helicopter money is faute de mieux. The fed has a dual mandate but are cowards. I don't blame politicians for being cowards, well I do but it's like blaming water for being wet. But central bankers have more leeway.

  7. John Crudas wrote the Labour party manifesto, and was in charge of the policy review during the last parliament, coming up with "One Nation: Labour's Political Renewal" in 2014 so he is highly implicated in the failure of Labour to sell itself to the electorate at the last election.

    Anyone who reads what Crudas produced before the last election should recognise that he is part of the problem, not the solution. It is people like John Crudas who were highly involved in the failure of Labour to tell the story of the economic crash and its real causes, (and the way in which Tory policies were making the recovery so much worse than it need have been) in simple language that everyone could understand and remember.

  8. The Problem is : Yes a higher Inflation target would be reasonable. And helicopter money the way o achive it.
    However, the ibfluential people, the once who write the big checks. Are generally against higher Inflation. However, qe is a different story since it pushed up stocks massively (which they are invested in).
    Which Mord than outgains the negative effects oft Inflation in their wealth.

    If there would be a central planer who tries to maximize the welfare of everyone he would implement helicopter with gov spend.

    Sadly, this is not the world we live in.

    1. But this points out that HM does NOT have to imply a higher inflation target. Did you both to read it?

  9. Left-of-center parties seem determined to find out what people want, and then do that.

    Right-of-center parties seem determined to do what they want, and then find out a way to make people like it.

    You can guess which one I think is a more effective strategy.


  11. "It is saying I'm doing the second best policy B because policy A is not happening, but I'm not going to do policy C because it can be just like policy A! "

    Maybe that's the illogical implication in this case.

    But the more legitimate argument is that policy C (helicopter money) is a form of fiscal policy - and fiscal policy is not within the authority of the central bank.

    (It's fiscal policy because it results in a marginal loss to the capital position of the central bank (whether or not formal recapitalization with bonds takes place), which shows up as a direct marginal impact on the budget deficit (whether or not formal recapitalization with bonds takes place.)

    Helicopter money as an idea for central banks is an intended usurpation of fiscal policy authority - which is why it doesn't get proposed or implemented by central banks.

    1. I completely understand why it might not be proposed by central banks, but that does not explain why the argue against its effectiveness. (No, I wouldn't like another better instrument, thank you). The argument that they cannot do it because its similar to fiscal policy is silly - whats in a name. The central bank will do what ever a government delegates it to do.

  12. "Helicopter money" means a permanent increase in base money (and hence a permanent increase in the equilibrium price level) **relative to what would otherwise have happened** (and not necessarily relative to what would have happened if the Bank had actually hit its inflation target every year, or at least on average).

    I expect that's your point, Simon. But it's a subtle one. All about drift under random walks. And I'm not sure if I have made the distinction clearly enough. So I can forgive Eric Lonergan for missing the distinction.

    The whole point about helicopter money is that it's supposed to be permanent, so the idea that the Bank might need recapitalising to withdraw that money at some future date seems to contradict the whole notion.

    Which leads me to two ugly thoughts:

    1. Suppose the "backing theorists" are right, to a very limited extent. There are always two equilibria: the normal one, where paper money has value; and a second one where paper money has zero value. And the only thing that knocks out that second equilibria is the threat/promise by the Bank to reduce the stock of base money to zero, if needed to preserve a positive value.An undercapitalised Bank would not be able to make that threat credible.

    2. Just suppose that there is a long-term secular decline in demand for base money, so it approaches zero in the limit. Just suppose. What the hell would "helicopter money" mean in such a world?

    And how many angels can dance on a pin, anyway?

    1. This is how the discussion appear to me, an amateur and hobbyist.

      Lonergan and Wren-Lewis are talking about a policy - QE for the people - which would close the output gap quickly and return the economy to full employment and the inflation target. In the U.S. we've had 38 consecutive months below target thanks to fiscal austerity and insufficient QEs. A QE for the people wouldn't be offset by the central bank because they haven't hit their inflation target yet.

      Beckworth and Rowe are talking about effective QE policy which means a permanent increase in the price level and return to trend growth. That would be ideal especially coupled with fiscal policy and a QE for the people. It would also mean higher than target inflation rate which is something central banks seem unwilling to do.

      After the next recession, if policy makers aren't willing to do countercyclical fiscal policy or sufficient QE, a QE for the people would be another alternative.

      This issue is closing the output gap quickly and reaching full employment and potential output. In the U.S., after the financial crisis, the government enacted fiscal and monetary stimulus. But once the economy returned to growth - which does not entail full recovery!!! - they turned to fiscal austerity and minimal monetary support. So that we are still waiting for full employment and wage gains.

      It could just be that this is how they like it:loose labor markets. We'll see what Yellen (and possibly Hillary) will do.

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    4. That should have been "unemployment above NAIRU". Typos ....Grrrrr.

    5. Nick says "“Helicopter money" means a permanent increase in base money (and hence a permanent increase in the equilibrium price level)…”. Nope. “Helicopter money” means it looks like inflation will be below target / unemployment above NAIRU, hence an increase in demand is needed.

      There shouldn’t be a “permanent increase in the equilibrium price level” in the sense that ideally inflation stays at the target rate.

      “The whole point about helicopter money is that it's supposed to be permanent…”. Why? It’s possible that a few years hence that the private sector decides it wants a lower stock of base money, in which case the stock would need reducing. That is, taxes would need to be raised and the money collected would have be “unprinted”.

      Finally, sorry about the deleted comments: due to typos similar blunders.

    6. Nick,

      Helicopter money is fiscal policy.

      Having broken the rules for the division of responsibilities by implementing it, central bank undercapitalization is not a problem for purposes of shrinking the monetary base back down.

      The central bank just taxes it away. That's no more strange than was seizing the fiscal expansionary authority that created it in the first place.

    7. Ralph again there is no need for tax *rates* to raise. If you have very strong auto stabilisers it should work.

  13. to me monetary policy equals increase the money supply

    and fiscal policy equals redistribute the wealth

    from a lower multiplier place to a higher multiplier place

    capital investment by governments, say to improve infrastructure, for example, not only increases and/or preserves wealth directly, but it increases total income and therefore production caused by increased consumption and this also can increase wealth

    production minus depletion of capital is what increases wealth

    helicopter money does the second part, increases income which increases consumption and production and therefore increases wealth

    they are both fiscal because they both work on increasing aggregate demand

    qe liquidates what people already own causing those people to have increased cash looking for a return, ie looking for a place to be invested, and hopefully this investment leads to increased income and therefore production and consumption

    it can also lead to bubbles as we have seen

  14. Isn' t the distinction between helicopter money and QE in good part about the embedding of the distinction between transactions balances and investment balances in different institutions and circuits? The Vickers report showed how the incestuous financial circuit dwarfs the retail banking one that occasionally interacts with the real economy. Just "expanding the money supply" doesn't do anything if it never gets into the hands of households and non-financial firms.

  15. It is not the creation of money that is crucial but what is done with it. Firstly, helicopter money may just suck in imports if just given out as tax credits or benefits. If government becomes an employer of last resort, or gives grants to businesses to increase production, and to researchers to work on say, green energy, this would build the economy and give the young training and the ability to leave home. (three million still live with their parents when I last looked). Aggregate demand would then build the UK economy instead of Chinas.
    Also, reading Danny Dorlings article today in the Guardian, the helicopter money should be used to pay off student debt to zero, giving the young the chance to a decent standard of living not burdened with debt. This will as Dorling says, be passed onto private buyers of debt, the banks otherwise.
    Private debt is the legacy we hand onto the young, not public debt, which is an asset to the private sector.
    As for John Cruddas, as said above, the questions are all loaded, false attribution, and designed to get the answer required. People need to understand sectorial balances ie that they will be forced into debt or poverty by government cuts, in order to give a democratically informed answer to this question. They need to know that government money is an asset to them and that bank debt is a liability.


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