Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 9 August 2015

The Ethics of Helicopter Money

 A lot of the discussion of helicopter money is about macroeconomic mechanisms, which is of course fair enough and - for me at least - interesting. But helicopter money, because it is quite like fiscal policy, also raises ethical issues, and these are taken up in a recent post by Jeremy Stangroom. It is this and related issues that I want to talk about here.

To avoid distractions, let’s focus on a specific type of helicopter money (HM). The state sets up a distribution mechanism (the flight path of the helicopter, if you like) which the central bank is mandated to use if interest rates are in danger of hitting the zero lower bound, and it judges that without using this mechanism it will probably undershoot its inflation target. If at some later date the central bank finds that it is danger of becoming ‘policy insolvent’, the government agrees to recapitalise it. Thus there is no question of abandoning the inflation target in the distant future: HM is being used to avoid undershooting the inflation target in the near future.

This policy is close to being identical to a reverse poll tax. The key difference is that, unlike an actual government cash transfer that is debt financed and therefore appears to be almost surely matched by some tax increase or equivalent later, with HM the future tax increase may or may not happen, depending on whether the central bank does or does not need recapitalising.

The other key difference between HM and a reverse poll tax is that HM is initiated by the central bank. This encounters a form of the ‘no taxation without representation’ argument: redistributions should be made by the democratically elected government. However in the case of HM, the distribution mechanism is set up and endorsed by the government. Many distribution mechanisms are possible, and which is used is the government's choice. The only qualification is that the mechanism has to have a powerful, immediate and reasonably predictable impact on aggregate demand. (Paying for infrastructure investment could only be on this list of potential uses for HM if the investment could be immediate, and not just substituting for investment the government would have undertaken anyway.)

Thus HM is still government sanctioned. In addition the circumstances in which HM would be used are limited and precisely described, and the agent making these decisions - the central bank - should be accountable to the government. Of course many government agencies already make decisions that have huge impacts on particular individuals: in the case of the UK, NICE for example.

An additional argument that I together with Mark Blyth and Eric Lonergan have made is that conventional monetary policy also involves redistributions between savers and borrowers. Here Jeremy Stangroom makes a good point: savers and borrowers undertook their debt contracts knowing that interest rates could well rise or fall. In contrast, no one has contracted for helicopter money.

However I think there is an additional point to be made here. Savers and borrowers generally take out nominal debt contracts, and so they will be affected by movements in inflation. They may well undertake these debt contracts in the expectation that inflation will average the central bank’s inflation target. HM money is a way for the central bank to ensure this expectation is fulfilled.

I also think it is always important to discuss HM in comparative terms, and in particular thinking about it as an alternative to QE. Indeed I think this should become mandatory in discussing HM: after all most people who propose it do so because they think it does the same job QE is meant to do but better. To the extent that the central bank makes a loss on QE (and if QE is temporary they really could make a loss, which is why the Bank of England got the government to cover these losses), it involves given newly created money away. In this case the beneficiaries are those who sold their government debt to the central bank and then subsequently bought it back at a profit. It is not clear that most people would regard those profits gifted by an arm of the state as a just desert. [1]

I think at the end of the day the ethical issue does all come down to the extent that the government can delegate decisions which have distributional impacts on the population. After all, the relevant budget constraint from the private sector’s point of view is the consolidated public sector which includes the central bank. Newly created money has to go to someone. Absent QE the profits the central bank makes are returned to the government. With QE, there is a good chance that the central bank may be transferring this money to the financial sector. With HM, money goes to the public. HM has not been called ‘QE for the people’ for no reason. Arguably the state provides too much support to the financial sector as it is, even without QE.

[1] QE is not about buying assets to make a profit. The central bank buys existing government debt when it is expensive, because QE only happens when actual and expected short rates are low, and then sells it back to the market when short rates are higher (QE is expected to be unwound after short rates rise). This saves the government money on interest payments but also involves a capital loss.  


  1. The "set up and endorsed by the government" justification doesn't work.

    It doesn't matter how democratically perfect and unobjectionable the process by which a democratically accountable body divests itself of decision making power and hands it over to an unaccountable body may be. The objection to the unaccountable ECB's nakedly political role in the Greek crisis cannot be met by saying the process by which the ECB power structure was set up was itself perfectly democratic.

    A version of this argument was used by fascists in the 20s and 30s. As democratic process had handed over power to dictators, how could democrats then object to their exercising power?

    It is no answer to say that democratic legislatures could reverse the handover of power to these unaccountable institutions if they choose. The objection is to unaccountable individuals and bodies ever exercising this power. Full stop. This objection cannot be met by saying we could remove it from them at some point in the future. So what?

    In practice, once the handover of power has happened it is hard to get it back. How do we as citizens of the EU vote to change the ECB's leadership?

    The argument you make here is a common one made against democracy, and is at least as old as Plato. Experts (philosopher kings) will make better decisions. You have an additional side benefit argument (as supporters of central banks making such decisions usually do) that public trust in the institution will make things go better still. These kind of arguments can be popular amongst elected politicians as it can give them someone else to blame if things go badly.

    These utilitarian benefits given to justify dictatorship are never persuasive. We ought to bite the bullet, accept that there are costs to democracy (it isn't perfect) and resist those who favour dictatorship, however good their motives.

    It might be we could swallow this anti-democratic argument if the track record of central banks were universally recognised as being good and politically uncontroversial. Such a claim would, of course, be simply laughable.

    1. SpinningHugo,

      You completely fail to demonstrate that the system SW-L advocates is not democratic. You simply STATE that it is undemocratic.

      In fact the split of responsibilities between central bank and politicians under SW-L’s proposal is almost EXACTLY THE SAME as under the existing system. Under the existing system, the CB has the final say on the size of any stimulus package in that the CB can use interest rate adjustments to overrule stimulus decisions by politicians. But at the same time, democratically elected politicians retain complete control (quite rightly) over strictly political matters like what proportion of GDP is allocated to public spending and how that is split between different types of public spending (health, education, etc).

      Under stimulus implemented helicopter style, there is no difficulty whatever in retaining that split of responsibilities. Indeed, to all intents and purposes we’ve implemented helicoptering, and big time, over the last few years in that we’ve implemented fiscal stimulus (i.e. government borrows and spends) and followed that by QE. That nets out to “print and spend”.

      I haven’t heard any complaints to the effect that that equals the end of democracy as we know it.

    2. Ralph,

      Again you assume (as you have done on previous occasions) that I think that giving a/the CB control of interest rates is fine, and argue that therefore this is no worse and should be accepted.

      Actually I don't think it is fine at all. I think it is a disgrace, and that there were very good democratic reasons why governments before Brown did not do it (However beneficial in market confidence terms it may be to have panels of 'experts' like Blanchflower and Sentance making monetary policy decisions instead of people with political bias. Ha!) Why stop here? Why not have rules enforced by panels of 'experts' for determining fiscal policy? Productivity policy? All policies requiring expertise?

      Of course democracy would not be 'over' if we handed over yet more power to the CB. But to claim, as you and S W-L want to do, that there is *no* democratic trade off is, at best, blinkered. Argue, if you like, that this loss of democratic legitimacy is a price worth paying. That at least would be honest.

      Now, of course in no system can all exercises of state power be undertaken by those with a democratic mandate. Civil servants have to make lots and lots of mid to low level decisions otherwise the system cannot function.

      The issue is whether questions like monetary policy and helicopter drops are of this low level kind, or are high level decisions impacting everyone in profound and important ways. Again, the answer is obvious.

      It is fully to be expected that Philosopher Kings think that things would go better if power was in the hands of Philosopher Kings rather than in the grubby hands of politicians.

      But, imagine a hypothetical world where in 2010 and 2015 the UK elections had gone in the way S W-L had preferred. Does anybody think he would in such a world now be arguing for a system in the UK where further power to provide a stimulus were handed over to those without democratic mandate? Were these arguments being made before 2010, and if not why not?

      Democracy commonly gives rise to sub-optimal results in economic terms. Economists should suck it up.

    3. SpinningHugo,

      The fact that you personally don’t want stimulus decisions delegated to central banks is irrelevant. That delegation is perfectly democratic and for the simple reason that that decision to delegate was taken by democratically elected politicians. Plus Gordon Brown’s decision to delegate more powers to the BoE has met with general approval (if not universal approval) from politicians and the electorate.

      Re your question “Why stop there?”, my answer is, “Absolutely no reason to stop there.” That is, if politicians and the electorate in the future decide to delegate more (or fewer) powers to experts, that’s OK by me. That decision is democratic.

      Next, you claim I’m saying there is no “democratic trade off”. Your claim there has two possible meanings. First you are possibly saying that I think there is no choice as to how responsibilities are split as between politicians and experts. Not true: clearly there all shades of grey there: i.e. any number of ways of splitting responsibilities.

      Second, perhaps you are saying that in moving from an “adjusting interest rates” system to an “adjusting HM” system, there is a loss of democracy. That is also not true. As I explained above, in both scenarios the ultimate decision on the size of a stimulus package is taken by the central bank, while obviously political decisions, like what proportion of GDP is allocated to public spending rests with politicians,(quite rightly).

    4. "That delegation is perfectly democratic and for the simple reason that that decision to delegate was taken by democratically elected politicians."

      Ralph, as I have tried to explain, no political theorist would accept that.

      If it were true, then Hitler's Germany was perfectly democratic as the decision to confer power upon the Fuerhrer was taken using impeccable democratic means.

      "Plus Gordon Brown’s decision to delegate more powers to the BoE has met with general approval "

      Lots of anti-democratic decisions are popular. See also the history of Hitler's Germany.

    5. SH: So presumably you are against all independent agencies like NICE, that take potentially 'high level' decisions.

    6. "If it were true, then Hitler's Germany was perfectly democratic as the decision to confer power upon the Fuerhrer was taken using impeccable democratic means."

      That's totally absurd. SWL isn't saying you should give absolute dictatorial powers to the central bank. He's saying decision-making can be delegated, subject to oversight and review.

      And there was nothing 'democratic' about the nazi regime. They put an end to free elections, outlawed all opposition, turned Germany into a totalitarian dictatorship, took over every civilian organisation in the country, arbitrarily stripped people of all their rights, locked up and murdered their political opponents and anyone else they didn't like.

    7. S W-L

      Does NICE make decisions as important as setting the monetary policy for a nation? Further my understanding of NICE (which is pretty minimal) is that it provides guidance. I'd have the same problem with health policy being handed over to a panel of independent experts independent of the Sec of State for Health as I do to CBs having helicopter money powers. I am pretty sure we could find an expert who could manage things better than Jeremy Hunt. I don't care.


      "subject to oversight and review"

      The entire point of an independent central bank is that it is independent. The Chancellor (or whoever) doesn't get to override their decisions.

      I am also unsure whether you have grasped my point. My point is that if a democratic institution gives away state power to a non-democratic institution then that creates a democratic deficit. It is no good arguing that the decision to give away this power was democratic. That doesn't confer the exercise of power by the body to whom this power is then given democratic legitimacy. If it did, the Nazi regime would have been democratic. And it wasn't.

    8. "Re your question “Why stop there?”, my answer is, “Absolutely no reason to stop there.” That is, if politicians and the electorate in the future decide to delegate more (or fewer) powers to experts, that’s OK by me. That decision is democratic."
      OK but the treasury will still have reserve powers over the BoE right? We are comparing like with like.

    9. "The Chancellor (or whoever) doesn't get to override their decisions."

      The government has given the BoE a policy target and specified the means by which it can pursue it. If the government wanted to change what the BoE does, it could. And the BoE is of course accountable to the government. 'Independence' simply means that the government doesn't get involved with Bank decisions, given the Bank's remit. i.e. it doesn't tell the BoE when to raise or lower interest rates, etc. This is supposed to inspire confidence that the Bank's policy target will not be arbitrarily abandoned for short-term political reasons.

    10. The Bank of England is a subsidiary of HM Treasury (as shown in the Whole of Government Accounts), and is required by law to take direction from HM Treasury (4(1) of Bank of England Act 1946). Any 'independence' the BoE has is limited.

    11. "My point is that if a democratic institution gives away state power to a non-democratic institution then that creates a democratic deficit."

      There's a difference between 'giving away state power' and delegating decision making. If the electorate wanted BoE activities to be placed under the direct management of the Treasury, that could happen. But at present the dominant view is that it should be kept separate.

    12. Philippe

      There is indeed a difference between delegating a power and divesting oneself of it: one that I recognised in my original post.

      So, the difference is that the State can take back the power it has given. Does that make the decisions taken by bodies with no democratic mandate anymore democratic?


      As I said.

      Philippe and Random
      Yes, I know the UK Central Bank's independence has limits. So, it has a policy agenda set by the government, and in theory is subject to democratic override (though not in practice).

      But these nuances are neither here nor there. The entire point of having an independent Bank is to make it independent of those pesky democrats. Of course the degree to which this is so is a question of degree.We can, no doubt, construct many systems along a scale where at one end an institutions role is merely advisory, at the other where it has constitutional power that cannot be taken away even by an Act of Parliament.

      The entire point of S W-L's central bank proposals is however to remove decision making from politicians and put it into the hands of unelected technocrats.

      We have been going through the worst crisis in the European Union's history, where the folly of handing over power to technocrats without mandate has been revealed for the folly it is. It has also been a startling refutation of the idea that the technocrats are uniformly wise and good.

      And still some argue for yet more rule by the technocrats.

      No thanks.

    13. SpinningHugo.

      Let's say the government decided to directly manage the BoE. It also promised to hit a 2% inflation rate on average.

      According to you this would be undemocratic because it had decided to tie its own hands by adopting a policy target.

      That's basically what you're saying.

    14. now you are trying to confuse the matter by switching to talking about the EU.

      What we are talking about is the Bank of England, which is not the same thing as the ECB or the eurozone.

      "in theory is subject to democratic override (though not in practice)."

      Why do you say not in practice?

    15. Philippe

      1. That is not 'basically what I am saying' no.

      If a democratic government adopts a policy of this kind it has

      (i) the mandate to do so


      (ii) can be removed from office by democratic means.

      2. The point about the EU is that it is the largest and most prominent form of a technocracy we have. The ECB is independent, and its mandate is determined by rules as well. however, we have just seen the downsides of the kind of technocracy you and S W-L prefer played out in real time for us.

      And no, I don't think we are just talking about the bank of England. S W-L's post does not mention it: it wasn't directed in principle at any specific jurisdiction.

      3. Not in practice because in practice since Brown gave the Bank of England independence in 1997 no decision has in fact ever been challenged.

    16. "we have just seen the downsides of the kind of technocracy you and S W-L prefer played out in real time for us."

      Obviously not though as neither of us is advocating that, despite your desire to believe otherwise.

    17. @SH
      George Osborne just removed responsibility for setting the minimum wage from the LPC. The Philosopher Kings were granted their power, and now they have been stripped of it.
      Even in the case of the ECB the 'nakedly political role' of the institution in the Greek crisis shows that this kind of delegation is never absolute. The problem with the eurozone is political: the Kings could be dethroned, but the mechanisms to achieve this have been explicitly designed not to work. In this matter at least the UK government isn't constrained by the political huis clos of EU decision-making.
      More generally your Nazi analogy fails to differentiate between using a democratic mandate to accrue more power to yourself from using that mandate to delegate power to someone else. These things are rather different.

    18. JD

      Yet again, of course they are different.

      The point of the analogy is to show how the "set up and endorsed by the government" argument does not, as is thought, means that the delegation has no democratic trade off.

      And as I said in the original post

      "t is no answer to say that democratic legislatures could reverse the handover of power to these unaccountable institutions if they choose. The objection is to unaccountable individuals and bodies ever exercising this power. Full stop"

      So no, for the avoidance of doubt, I am not claimining that giving central banks helicopter drop powers is the same as the worst excesses of Nazi Germany.

      I am saying that it results in more power being exercised by those with no democratic mandate, and that the argument that a democratic legislature has sanctioned this does not overcome the problem as so many seem to think.

      The Low Pay Commission's recommendations were never binding. They did not set the minimum wage.

    19. To me the use of the analogy illustrates the absurdity of your position. I don't think this perfect 'democratic mandate' you speak of exists. Democracy involves the delegation of power at all sorts of levels: sometimes it's a good idea, sometimes it isn't. The independence of the BOI was obviously a very significant delegation, but it is generally considered to have been a success, and in any case I for one don't lie awake at night worrying that a future UK government wouldn't be able to reverse it if it wanted to.

    20. Hi Hugo - could you explain what form democratic accountability takes when it comes to highly technical issues like the setting of interest rates? A general election every five years is not really an opportunity for the electorate to inform the government what central bank policy should be.

      99% of the electorate doesn't understand how the mechanism works or what exactly it's for, and don't know how to tell whether those in charge have done a good job or not. The accountability you are calling for would be essentially symbolic, would it not? How do hold someone accountable when you don't know what their job involves or how to judge them on it?

    21. Sam,

      Yes, those are all standard arguments against representative democracy, and in favour of rule by Technocrats.

      You could replace 'interest rates' with any other 'technical issue' you liked in your question.

      I am not claiming representative democracy is perfect, or that the degree of accountability is high. I do however think it is worth maintaining, and that rule by elected representatives is the best available option. Serious people over centuries have not agreed of course, and think you are right. Plato wasn't an idiot.

    22. I'm not making an argument against representative democracy. I'm just pointing out that the accountability you call for is more symbolic than actual.

      Maybe a better way to improve democratic accountability of central bank policy would be to educate the population more about economic ideas. There would be better oversight of the handling of the economy if the electorate understood the underlying concepts -- regardless of whether particular powers were in the hands of technocrats or elected representatives, a distinction that currently has few if any genuine implications for democracy given public ignorance.

  2. SW-L’s above arguments are much the same as those put by Positive Money, the New Economics Foundation and Prof Richard Werner in their joint submission to Vickers. See:

    In particular SW-L and the latter three authors both argue that the central bank should be responsible for deciding the TOTAL AMOUNT of HM to be spent, while democratically elected politicians decide the EXACT NATURE of that additional spending (or cut in taxes, if politicians so choose). Agreed.

    However SW-L and the above three authors differ on one point (and I agree with the three authors here). SW-L says helicoptering should only be done at the zero lower bound. In contrast, the three authors argue that interest rate adjustments are not very effective, and that stimulus should ALWAYS be implemented via helicoptering. One reason I agree with the three authors is that interest rate adjustments are distortionary: they only effect (at least initially) households and firms with significant variable rate loans. In contrast, households and firms with FIXED RATE loans or no loans are not affected.

  3. The idea is concetually flawed. It confuses infaltion that is caused by an abundance of money with inflation caused by government consuming too much economic resources. If previouse consumption results in a derth of economic resources then that is not corrected by raising taxes. If the economic resources for peoples requirements are not there because they have been consumed, they are not replaced by raising taxes.

    1. Private money creation , ie money created by borrowers, and the spending of it, contains the re-provisioning of economic resources because borrowers are contractually obligated to produce and to provide economic resources in the course of honouring their loan contracts.

    2. "[resources] are not replaced by raising taxes."

      Irrelevant. Raising taxes serves to reduce nominal demand for resources.

      "borrowers are contractually obligated to produce and to provide economic resources in the course of honouring their loan contracts."

      Of course that isn't true at all. Borrowers are only contractually obliged to repay the amount of money they have borrowed plus interest.

    3. Borrowers satify demand in order to aquire the money they have borrowed.

      Raising taxes in order to reduce demand is conceptually flawed as it does not supply resources.

    4. Of course taxation in itself doesn't supply resources. Neither does paying rent or paying bills supply resources. Each is simply a transfer of money. But there is nothing 'conceptually flawed' about the idea that raising taxes reduces nominal demand for resources.

    5. Raising taxes to reduce demand does not compensate for lack of supply caused by previous government consumption.
      Using pre existing deposits created by private sector borrowers, entails future supply from borrowers in the process of the repayment of the associated loan contracts. It also entails the prior scrutiny and the decision of bank loan officers and borrowers that that will be the case.

    6. Raising taxes to reduce demand does not compensate for lack of supply caused by previous government consumption. the government acquiring resources by decree and then pursuing to reduce the metric of price inflation by removing the means of transaction from the population, leaves the economy with a dearth of supply.
      It is in no way the equivalent of the government intervening in the pre existing money transactions of the economy in order to obtain spending power.
      Government spending from taxation or borrowing of pre existing deposits uses deposits that inherently entails future supply from the borrowers obligation to the associated loan contracts. It also entails the prior scrutiny , and the conclusion of , bank loan officers and borrowers, that , that supply will be forthcoming.

  4. Isnt one benefit of Qe that the central bank gets an asset which it can sell at a fututre date do decrease inflation( if needed)?

    With HM you dont have that safety net.
    Again I still think Hm is supperior to Qe however, that would be an arguement against it right?

  5. This is why I talk about a commitment to gift the central bank assets if they need it. See at greater length here

  6. If the central bank gets bonds or anything else in exchange for the money, then it's not helicopter money. If the government promises to recapitalize the central bank down the road, then it's not helicopter money.

    Maybe if the central bank had previously issued a total of $100, at a rate of $1=1 oz. of silver, and if the central bank's assets are currently worth 150 oz, then the central bank could load up a helicopter with $50 and have at it. That $50 could legitimately be called helicopter money, except that it's adequately backed by the central bank's assets, and so will hold its value even as more is issued.

    But 99% of the time, when economists talk about helicopter money, they are talking about something that doesn't exist.

    1. Helicopter money is money the central bank prints/creates on a computer and then just gives away for free ("throws it out of a helicopter').

      So yes, it can clearly exist.

    2. and it has nothing to do with ounces of silver.

    3. Yeah I'm not clear on the "recapitalization" bit. Isn't it an accounting fiction? Are there differences between the Bank of England and the U.S. which has the reserve currency?

      I don't think it matters as long as the markets believe the government can collect taxes and won't let inflation get out of hand.

      As long as you have a printing press you can "recapitalize" the central bank and create money.

    4. If you want to get back to the previous NGDP trend growth rate then you need permanent increases. This will raise the inflation rate above target and allow "catch up growth." This is ideal.

      QE for the people as I understand it is just about hitting the inflation target and closing the output gap after a recession. It's a much more modest goal and is a alternative to regular QE at the zero lower bound.

    5. Phillippe:
      It has everything to do with ounces of silver. If the bank either gets assets in exchange for the new money, or else has enough existing assets to buy back all the money it has issued, including the new money, then it's not helicopter money.

      As long as the government can collect taxes, and as long as the central bank is viewed as part of the government, then the government's "taxes receivable" back the central bank's money just like the central bank's bonds would do, and it's not helicopter money.

      Recapitalizing the central bank would require giving it more assets. A printing press can give the central bank more liabilities, but not more assets.

      I suppose the Keynesians populating this blog would nod in agreement about targets, catch-up growth, output gaps and so on, but it's a very shaky set of ideas with no logical foundation.

  7. "The key difference is that, unlike an actual government cash transfer that is debt financed and therefore appears to be almost surely matched by some tax increase or equivalent later, with HM the future tax increase may or may not happen, depending on whether the central bank does or does not need recapitalising."

    If we're assuming the inflation target is unchanged, aren't the circumstances that would force taxes to be increased to repay debt essentially the same as those that would force taxes to be raised to recapitalise the central bank?

    1. In effect, yes. The way I would put it is this. If HM does not require future recapitalisation, that is because of profits the bank makes which would otherwise have gone to the government. Those profits could have been used to pay back the borrowing required to cut taxes.

  8. "I think at the end of the day the ethical issue does all come down to the extent that the government can delegate decisions which have distributional impacts on the population."

    Yes I believe the liberal-left wants the government to manage the economy to ensure full employment and rising wages. This means prosperity. The rightwing say they want that but in reality their policies are about maintaining the value of money and debt contracts regardless of distributional impacts.

    The rightwing badmouthed QE just as they badmouth fiscal stimulus, but I don't know if they'd go for QE for the people instead.

    Ideally in an ideal economy, monetary policy works by giving new money to the banks to invest. Ideally, the wiser banks invest smartly and wisely and are rewarded with profits while other banks invest unwisely and go out of business. By investing profitably, the wiser banks help out society as a whole. Or at least that's the story but in practice things are different.

    So since the economy doesn't work in this ideal manner, I don't know how ethical this is. Really it's just a political compromise. This is the only manner in which the rightwing will allow the government to stabilize the economy.

    1. «The rightwing say they want that but in reality their policies are about maintaining the value of money and debt contracts regardless of distributional impacts.»

      I think that implies a very outmoded idea of the rightwing. The interests that sponsor the right are nowadays largely on on the side of ever increasing leverage, not of hard money or creditors interests.

      Because the interests that sponsor the right are largely the City, which makes a lot of money from charging for debt, and property owners, who make a lot of *capital gains* from booming debt pushing up the price of their properties.

      Hard money and creditor interests are no longer dominant in the right, and indeed they are deeply disappointed, and the most they get is really small consolation as in the "tory pensioner bonds" that G Osborne created.

      As D Cameron wrote, mostly sincerely I think:

      «It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours… …and the unthinkable damage that a sharp rise in interest rates would do. When you’ve got a mountain of private sector debt, built up during the boom… …low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills. In this way, low interest rates mean more money to spare to invest for the future.
      A sharp rise in interest rates – as has happened in other countries which lost the world’s confidence – would put all this at risk… …with more businesses going bust and more families losing their homes.»

    2. We just disagree. The evidence I would point to in the U.S. context is that when center-right economists like Mankiw and Rogoff suggested raising the inflation target, they were quickly shot down and went back to towing the party line.

      In Europe of course there is the example of the humiliation of Greece.

      Cameron is just fanning the flames of fear that without austerity, they'd get a rise in interest rates. As usual I disagree with most everything you write.

      I would agree that the rightwing wants to dismantle the regulations of Frank-Dodd so they don't want limits on leverage and that sort of thing.

  9. "Helicopter money" does not need an helicopter, and without the helicopter essentially resolves in the central bank crediting the private-bank accounts of households with increased balances.

    It is thus essentially credit policy: it is equivalent to the government telling private banks to lend a new overdraft to households, and the central bank paying that back to the private banks on behalf of the households, or equivalently, recapitalizing the private banks with the same amount of money as they write off those overdrafts.

    It is in this sense similar to the credit policy of the past 30 years in which the government has told private banks to lend new overdrafts to house owners, and then made sure that house prices rose enough to enable the paying back of those overdrafts, and when this did not happen, engaged in direct "recapitalization" of those banks.

    Both policies resolve in credit-fueled capital gains for the recipient. Both are in effect cases of "private keynesianism", the felicitous phrase by C Crouch describing the case where governments boost demand not by borrowing and spending themselves, but by boosting the borrowing and spending of the private sector, where the borrowing by the private sector is of course still implicitly guaranteed by the government.

    The distributional impact seems rather different though between property-based "private keynesianim" and its helicopter money variant, as to beneficiaries (not necessarily the same as *net* beneficiaries):

    * In the property-based variant all property owners, whether individual or corporate, benefit. In particular those with above-average property holdings benefit (voters in the South).
    * In the helicopter-money variant all recipients benefit, and I would think that recipients would be actual persons, not corporate persons.

    * In the property-based variant the private banks make a lot of profit in interest spread and fees on the property loans even if they are in effect government-guaranteed. In the helicopter money case they get fully reimbursed by the government for the new balances depositors get, but no more.

    And as to who loses:

    * In the property-based variant most costs are borne in the short term by those without property or with below-average property holdings (voters in the North mostly). Plus eventually all taxpayers when the property price boom collapses and the losses on the private loans get nationalized by the government.

    * With helicopter money all the new credit given is instantly nationalized, not jut the portion of credit that has become unrepayable as in the property-based variant. But the cost to taxpayers is limited to a fixed small sum per household, while the cost of nationalizing property speculation losses can be much larger overall.
    * In the helicopter money variant the banks lose on charging high interest rates to those households that would have been given for an ordinary overdraft absent the helicopter money amounts.

    Put another way, in the property based scheme *large* capital gains and other benefits flow mostly to southern voters and corporations and banks at the eventual cost to all taxpayers, in helicopter money *small* capital gains are given directly to all citizens regardless of area of residence but not to corporates, and the banks don't make large interest spread profits.

    Note: "*large" and "small" rely on realistic assumptions: capital gains on property speculation in the South have been around £10,000 a year for 15-20 years for small terraced houses, and much more for larger properties or London properties, while presumably helicopter money would involve sums like £3,000-£5,000 a year for a few years, even if to a larger base.

  10. If the remuneration/capital loss issue can be tolerated, why not just do mass direct loans to SMEs at the base rate. Bam. No fiscal democratic issue. This would force commercial rates lower in order to change compete.

  11. "The key difference is that, unlike an actual government cash transfer that is debt financed and therefore appears to be almost surely matched by some tax increase or equivalent later, "
    Almost surely?
    Government spending always works by crediting bank accounts.
    Government (and other entities) spend from its buffer first and then backfill the buffer. But in a government that issues its own currency that buffer is essentially infinite. This is just basic treasury operations you do in any organisation.
    "'Other Liabilities' includes the cash buffers of HM Treasury and the Consolidated and National Loan Funds as well as the Asset Purchase Facility."
    These buffers can be extended to be as large as the government wants.
    And the government has access via the Ways and Means Account to central bank money at all times.
    But spending only increases reserves on a temporary intraday basis because the DMO are constantly refilling the buffer by selling Gilts. So what you really spend is Gilts.
    Gilts are not a claim on future tax revenues at all - any more than a £10 note is or £10 of bank reserves. They are just a form of reserve asset from the Government sector and the central issuer of Sterling liquidity. They get swapped backwards and forwards regularly.
    Even if you did think the government needed to collect tax later for some reason why would you have to raise tax *rates*?? No explanation.

  12. From a citizen's perspective helicopter money is simply less positive tax or more negative tax, ie more 'benefits'. Tax rates and benefits can vary and people know that. Much like interest rates.

  13. There is a discussion here:
    Helicopter Money is Basic Income provided by the Central Bank.

  14. "HM has not been called ‘QE for the people’ for no reason. Arguably the state provides too much support to the financial sector as it is, even without QE."
    Look the easiest way to do this is government runs an overdraft at the Central Bank - Ways and Means Account. Set interest rates to zero.

  15. It is very interesting that economists still think that HM used to raise inflation to target of 2% and then stops HM once it reaches the target, that will keep producing inflation.
    How long can HM keep afecting inflation after it is cancelled? 2 months, 6, a year, 2years, 10 or 100 years?

    It is really astonishing that such good economist as SW-L think that once stoped HM will keep raising inflation and that then needs to be countered by pulling out previosly issued HM or countered by monetary policy.

    Please, please, economics is dynamic, not static as this countering of HM in the future suggests.

    1. I believe that confusion comes from conflating spending by HM and by borrowing. If government stimulates by borrowing more then it is forced to keep spending more due to interest it has to pay which is additional to agregate demand, even tough inflation is on target. With borrowed funds governemnet is stimulating economy even tough the need is not there anymore so it needs to be countered. With HM once it stops issuing HM there is no more stimulating effect.

      Again, stimulating effect of HM stops once HM stops, with borrowing for stimulus the interest that has to be paid indefently (government never pay of principal debts) stimuluskeeps coming.

      There is no need to pull moral question on HM when you have real good economic reasons to use it instead of borrowing for stimulus but economists have to learn dynamics of money and debt to find good models.

    2. You need specific fiscal policy and very strong auro-stabilisers. Not spraying money in all directions.
      How SWL can support this is beyond me.

    3. Bond Interest is just a type of welfare payment. There are no Magical Properties to it.
      When bond interest is spent, it generates tax and this is spend generates tax, etc. So the other part of what you are saying is false.

    4. Random,
      What you are saying is that 10% (or50%) tax on bond income is more destimulating then 100% of the total received. Fantastic conclusion.

    5. Er I guess
      I was going by this logic:

    6. Only the money received can be stimulating, not the portion that is not received and never supposed to have received. The real truth is zhat taxes have no effect on a long term equilibrium. People would have received the same real value weather taxed or not. In long term inflation makes purchasing parity equal wether tax or not. But in short term change of tax can have huge effects. Only in short term soon after change.
      In the real world the rate of change is what matters not static relations.

    7. SW-L is quite right to say that HM keeps influencing inflation after it stops being produced, and Jure Jordan is wrong to question that point. The reason has been pointed out over and over by MMTers, namely that HM is or results in an increase in private sector paper assets or “private sector net financial assets” (PSNFA) as MMTers tend to call it.

      However, inflation is constantly eroding the value of PSNFA, and to that extent the inflation or stimulus producing effect of a given stock of PSNFA declines over time. The net effect of all that is that if HM alone is used to adjust stimulus it will have to be produced almost every year, though the quantity will vary depending on how much stimulus comes from other sources, e.g. exports or private sector irrational exuberance.

  16. But lets talk about why QE was necessery in the first place. Because incomes of the private borrowers was not supportive of such debt. Why, since incomes have been stagnating since 1980, how is that suddenly incomes become insuficient and peple started defaulting? What supported stagnating income with growing debt? Decades of Falling interest rates reached 0.
    If income does not grow then the portion of income that goes toward the debt servicing can stay the same and debt grow only by lowering interest portion for servicing. 2008 mark the period when interest rates reached bottom causing the burden of debt servicing to reduce discretionary spending by people.

    Defaults caused banks to start failing and QE was implemented to save banks and earn easy income to pay off liabilities caused by mortgage and business defaults.

    With adequate and timely HM there would be no defaults causing banks to loose money while people would keep houses and credit card spending as before.

    So, TIMELY HM would prevent further eroding of spending not add to it which would be inflation causing.

    HM is to prevent further eroding of private spending not add to spending, so why the thinking about need to counter inflation from HM when all it would do is preventing deflation and extra low inflation.

    Again, economics is dynamic where the rate of change matter not static as most economists think and talk.

  17. As someone who is a small investor in mostly US equities, the Fed's QE seemed to boost equities greatly. When the fed pulled back , see the last few weeks, markets dipped.

    Yet Fridays unemployment rate was ok,not great. Maybe HM is the better way to growth rather than QE. I invested in Apple few years back, and they have lot of cash they just sit on.

    The central banks are comprised of hopefully competent economists who can evaluate interest rates, trending inflation, unemployment and median wages, and likely fiscal policy given the politics.

    I have read a poster say HM is illegal in the US, don't know. But the US would be the best place to try this I reckon bc the dollar is reserve currency and is too strong. Also, if it worked here it would have greater spill off effects. Unfortunately our politics and culture makes nigh on unthinkable. Some gutsy central bank with a depressed economy should try it.

  18. This question probably out of bounds, but why should financial resources of the state be used to gee up inflation to meet a target, why not be more specific and include unemployment amelioration as well?

    Who should get the money? Should there be an asset/income test?

    Should the money be distributed if there was a high risk it would be largely diverted to socially unacceptable activities such as smoking, boozing and gambling? It may result in long term negative health and social costs. The moral deprivation aspects might be overwhelmed by the sensual/emotional aspects (if only momentary).

    What if the money is largely spent on foreign produced consumer goods (TVs from China say)? This might kick up local prices but will it do the economy (local unemployment) any good?

    1. I forgot to add that during the horrid days of 2009 the Australian Rudd government, via fiscal transfer, gave away a swag of money - it was suggested that a good deal of it would go to the tattoo industry - I suppose a tattoo lead recovery is better than nothing.


    2. What you are saying is that people will not drink gamble and smoke unless government gives them the money. Realy interesting.
      Another point is that people will not tattoo unless they are incentivised by government.even more interesting.

      You are looking at ideal government that knows and have such resources to prevent wastefull spending which definitevly requiers much much bigger governments then we have.

      Only perfect way to perfectly use funds would be if governemt make contracts only with non-profits or with state owned corporations. Contracting privaate corps will asure huge profits going to buy foreign luxuries like french vines and yahts.
      Any deales with profit organizations involves huge profits going to be spent on imports.

      Do you like your ideal world, where it exists?

    3. And what was so horrid with Rudd? The fact that his governement spent $52 b giving to people, building schools, pension system and housing saved Aus from recession from debt deleverage?

    4. Jure,

      What I am saying is that giving out HM may lead to that money being diverted to expenditure which does not suit the goals of the exercise. So, perhaps better ways of directing expenditure may need to be found. What is the point of giving money out if it is diverted to the purchase of foreign goods, for instance?

      Regarding "horrid", I was not referring to Rudd but to the GFC.


    5. But can you find a spending that does not divert some parts to unwanzed purposes?
      And would such enforecement cost more then divertion of funds?

    6. All good questions that need to be looked at.


  19. Professor Wren-Lewis, your helicopter money proposal seems so convoluted! You've taken a simple idea, wedded it to the morass of mainstream macroeconomics, and turned it into a byzantine bureaucratic mess.

    I assume that in the UK, just like the US, the government's accounts are held at the central bank. The simplest form of helicopter money, then, consists of the central bank adding numbers to the balance in that account. End of story.

    It's not a central bank *loan* to the government; or an asset purchase *from* the government, or anything like that. The central bank simply adds dollars to the account as a gift outright. Done. And you don't need to set up any special delegating mechanisms for the central bank to conduct its own separate fiscal policy on the side. The government carries out the spending in the same way it always does: the legislature passes spending bills.The difference is that, following the helicopter drop into the government account, the government now has extra money in its account that it doesn't have to pay back. No additional taxes; no new debt issuance; no fiscal drag coming from either of those directions.

    You also seem to run into all sorts of confusion in explaining the difference between helicopter money, however it is administered, and quantitative easing. Isn't it obvious? QE is an asset-purchasing program. The central bank creates dollars on the accounts of various asset dealers who, *in exchange*, surrender valuable assets to the central bank. With helicopter money, the recipients of the money don't surrender anything. The private sector retains all of those assets and the cash flows attached to them. But somebody gets free money in addition.

    You also say: "To the extent that the central bank makes a loss on QE (and if QE is temporary they really could make a loss, which is why the Bank of England got the government to cover these losses), it involves given newly created money away."

    From a broader, more consolidated perspective, it's not giving free money away if the government then covers it. That's just a transfer from one part of the economy to another. It works roughly the same way in the US system: If the Fed income statement shows a loss after expenses and statutorily mandated dividends are paid, it books that loss as a "deferred asset". The total amount of the accumulated deferred asset is counted against any disbursements to the treasury in subsequent profitable years, until such time as the government has paid off that deferred asset in the form of reduced distributions from the central bank.

    So if you want helicopter money to work, and to be a genuine helicopter drop and not a transfer, it would be best to take the helicopter money off of the central bank balance sheet. You authorize the central bank to make helicopter drops to the government's treasury, and legislate the accounting rules such that the money does not get added to the liability side of the central bank balance sheet or the expenses side of the income statement. It then doesn't represent a loss that has to be covered.

  20. In the US the Fed could just issue deposits to the individual states based on a simple per capita formula (say $500 per head), the states can then decide how to use the newly created funds. You could also just issue it as a tax credit. In either case you account for it as Dan K Illustrates above.


Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time.