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.